economic differentiation through lifetime production

PIC Symposium 2011 | Nashville, TN

Economic Differentiation ThroughLifetime Production

Ken Stalder, ProfessorDepartment of Animal Science

Iowa State University, Ames, IA 50011-3150


Technology Adaptation in the Pork Industry

• Technology has allowed the pork industry to move from a labor intensive production system to an industry that is driven by technology advancement.– Early technology adopters

• Tend to reap the biggest rewards of technology adoption• Tend to be long term drivers of change in any industry• Drives economic efficiency • Tend to be the long term survivors in any industry

– Where will future technology improvements and economic efficiencies occur?


Benchmarking Values

• In the past we have focused on – Pigs per sow per year– Litters per sow per year– Pigs producer per farrowing crate– Etc.

• Tend to focus on those traits that:– Our production record system supplies– We think we can manage– We think has economic importance


Benchmark Values

• Some traits took us in a direction that we did not want to go– Example Litters / Sow / Year– A gilt is entered into the breeding herd record system

when confirmed pregnant– After weaning she is culled – She has no non-productive days– Will have a calculated LSY value that is unrealistic

(2.50 or greater depending on weaning age)– Culling too many gilts in this manner makes LSY look

good but it is BAD for lifetime productivity


Future Benchmarking Values Increasing in Importance

• Sow productive lifetime or sow longevity interest – High feed costs– Animal well-being issue– Producing “more with less”

• Spread sow costs over a greater number of pigs produced• Productivity improvement

– Sow vs gilt production– Sows’ offspring advantage vs gilts’ offspring

» ADG» Mortality» F:G


Different sow longevity traits

• Longevity trait evaluated can differ depending on goal• Economic evaluation• Lifetime productivity - derive some economic function

where sales dollars are needed, ether net or gross. – Lifetime number weaned– Lifetime market hogs sold

• Genetic, nutritional or other studies might be concerned other traits– length of life, – herd life, – productive life, – parity removed, or – some similar measure where the trait being examined defines

lifetime length and / or some removal activity.



• Productivity evaluation –– removal rate, – culling rate, – replacement rate, – percent gilts in herd,– mean parity of females in inventory, and – mean parity at removal.

• Some measures may not be appropriate– old, less productive sows can be retained just to improve parity or age structure of the herd

Caution differences can occur due to calculation method – use standardized definitions

Traits can be manipulated by managers to give desired outcome



• From a management perspective– Target longevity value should be the proportion of the herd

removed in early parities – Conversely the percentage of females remaining after parities one,

two or three – Average parity at removal may address

• The trait that has economic relevance is pigs produced per day of herd life– as sows become more productive (i.e. more pigs born alive, more

pigs weaned, or some defined output criteria) the number gets larger

– a sow that is productive but not consistent in rebreeding (i.e. non-productive days is increased), the animal becomes penalized in this situation as the output produced is divided by a greater number of days


Data accuracy is crucial

• Ease of data collection may help ensure that producers accurately collect necessary data

• Can the trait be calculated from values normally gathered in production records?

• Expected error rate is important– Knauer et al., 2007 – 25 to 30 of recorded reasons for culling were

not accurate• Frequency of errors and their type can significantly impact:

– Heritability estimates– Production records– Decisions – right and wrong made based upon data with relatively

high error rate.


Improving Sow Productive Lifetime

• Sow longevity or sow productive lifetime has an important economic impact on a pork operation.

• Reduced sow productive lifetime (i.e. parity of sow at culling) results in fewer litters in which a sow has an opportunity to be sufficiently productive in order for her purchase to be profitable.


Costs Associated with Replacing a Sow

• Replacement gilt • Facility, feed, and labor during isolation

and acclimation• Vaccination and other veterinary

expenses• Disease risk • Opportunity cost (interest rate)• Performance difference between a gilt and

mature sow• Performance differences between the

offspring from a gilt and a mature sow


What does the future lifetime sow productivity

look like


Evaluating Sow Productive Lifetime

Capital budgeting (or investment appraisal) is the planning process used to determine a firm's investments such as new machinery, replacement machinery, new plants, new products, and research and development projects.

Capital budgeting for a replacement gilt accounts for the number of periods (parities) a gilt will be in the herd and the initial cost of the gilt (or assigned value for a gilt produced within the herd) followed by periods of expenses and income.

Discounted cash flows, which determine a Net Present Value (NPV) when economically evaluating sow productive lifetime has been used.

A pork producer must supply information to determine the net present value of replacement gilts on a herd specific basis


Spreadsheet tool Sow Longevity Calculator

• Farrow-to-Finish and Breed-to-Wean custom spreadsheets available

• Uses Net Present Value analysis• The current version is 2.0• Producer supplies

– Herd specific production data– Income – Fixed and variable costs


Future Productivity

Price of Gilt 257.80$ Number of Pigs Sold/Litter 11.59Annual Discount Rate 6.50% Weight Sold, cwt. 2.70Parity Discount Rate 2.60% $/cwt. Hogs 47.00$ Percentage of gilts purchased that do not enter the breeding herd 10% Revenue/Litter 1,470.98$ Development Feed Costs 35.70$ Feed Cost/Litter 953.42$ Other Development Costs 7.50$ Other Expenses 292.67$ Total Development Costs 43.20$ Net Income/Litter 224.89$ Total Gilt Price 318.93$ Number of sows 2,500 Number of Pigs Born Alive/Litter 13 Litters/sow/Yr 2.5Birth to Weaning Death Loss 6.20% Total Litters/Yr 6,250

Nursery Death Loss 2.00%Average Parity of Farrowed Sows 2.50

Grow-Finish Death Loss 3.00% Years of Sow 1.00Death Loss on Sows 6.00% Weight of Sow @ Culling, lbs. 45Wt of Gilts @ Culling, lbs. 330 $/Cwt for Culls $35.00$/cwt for Cull Gilts 47.00$ Cull Value 14.81$ Revenue for Cull Gilts 15.51$


Fixed and Variable Expenses

Operation Total Per LitterInvestment / Facility Cost 12,058,091.00$ % Enterprise Equity 50%% Interest Rate 7%Annual Principal & Interest Payments ($838,668.51) (134.19)$

Veterinary and Medicine / Litter 159,757.20$ 17.66$ Breeding / Litter 80,280.00$ 56.17$ Waste Handling / Litter 2,676.00$ 22.40$ Insurance / Litter 5,352.00$ 8.00$ Labor / Litter 417,777.12$ 105.41$ Utilities / Litter 194,010.00$ 278.98$ Marketing and Hauling / Litter 45,652.56$ 44.80$ Maintence and Repairs / Litter 84,989.76$ 14.40$ Total Other Costs / Litter 1,829,163.15$ 292.67$ Non-Feed Costs/Pig 25.25$

Other Operating Expenses


Feed Costs

Class Weight FeedFeed

(lbs/hd)No. of Head)

Total (tons)

Price ($/ton)

Feed Cost ($)

Pigs 5-10 SEW Diet 1.00 12.19 0.006 $1,000.00 $6.1010-15 Transition Diet 3.00 12.11 0.018 $621.00 $11.2815-25 Phase II Diet 15.00 12.03 0.090 $339.00 $30.6025-50 Phase III Diet 48.00 11.95 0.287 $237.00 $68.0050-80 Grower Diet I 120.00 11.86 0.712 $220.00 $156.61

80-120 Grower Diet II 125.00 11.78 0.736 $212.00 $156.03120-170 Finisher Diet I 145.00 11.69 0.847 $208.00 $176.24

170-Finish Finisher Diet II 201.00 11.60 1.166 $203.00 $236.65 COST/HEADTotal 658.00 3.86 $217.87 $841.50 72.55$

Nursery-Finish Feed/Gain 2.53 Sows Gestation Diet 762.00 1.00 0.38 $204.00 $77.72

Lactation Diet 285.00 1.00 0.14 $240.00 $34.20Total 1,047.00 0.52 111.92

TOTAL FEED COST/PURCHASED

FEMALEGilts Replacement Gilt Diet 350 1 0.18 $204.00 $35.70 147.62$

TOTAL 4.56 209.05$ $953.42


Feed Costs cont’

Number of Days Pounds/Day Total Feed

Gestating 127 6 762Lactating 19 15 285Total 146Parities/Year 2.50 1047


Parity Adjustment

Parity Adjustments Number Born Alive Number Born Alive Adjustment

1 13.3 0.12 13.4 03 13.4 04 13.3 0.15 13.2 0.26 12.3 1.17 12 1.48 11.7 1.7

9 + 11.5 1.9


Parity Adjustment Caution

• Only make these adjustments if you are extremely confident in the production numbers by parity.

• Do not adjust if values from your herd are based on small numbers – Within a parity

– Across all parities


Expectations in Cambouroughs

Litter Size By Parity in CAMs

14.4 14.5 14.5 14.4 14.2

13.312.9

12.6

13.3 13.4 13.4 13.3 13.2

12.312.0

11.7

10.711.011.3

12.112.212.312.312.2

9

10

11

12

13

14

15

P1 P2 P3 P4 P5 P6 P7 P8

TBBAW

• 60 pigs weaned per lifetime -14 Total Born, 13 Born Alive, 12 Weaned

• Parity 5 average age at removal• 30 Pigs/Sow/Year


What does all of this information get you?


What is Net Present Value

• Net Present Value (NPV) analysis is the process of taking an investment today, projecting the future net income from this investment, and putting these future earnings into present-day dollars.

• The reason for putting future dollars in present-day value is because one dollar today is worth more than one dollar tomorrow.



• NPV IS the amount of money an investment is worth in today’s dollars.

• NPV takes into account:– the amount of the investment, – the length of the investment, – how long it takes the investment to return a profit, and– the cost of money (interest and risk).



• Pork producers can use NPV analysis when making purchasing decisions or when evaluating replacement breeding herd animals from different sources whose initial cost varies.

• Additionally, NPV analysis allows producers to compare gilts with different productivity levels, length of service, feed conversions, and purchase prices to determine which is the most profitable for their operation.


Net Present Value Analysis

What does the NPV number mean? > 0 means the investment is profitable

in the long term. < 0 means the investment will lose

money in the long term.


Net Present Value by Parity when the Price of Replacement Gilt Varies

Gilt Purchase Price 1 2 3 4 5 6

125 $57.71 $271.53 $479.94 $678.69 $872.40 $1,019.66

150 $29.93 $243.76 $452.16 $650.91 $844.62 $991.88

175 $2.15 $215.98 $424.38 $623.13 $816.85 $964.10

200 ($25.62) $188.20 $396.60 $595.35 $789.07 $936.32

225 ($53.40) $160.42 $368.83 $567.58 $761.29 $908.55

250 ($81.18) $132.64 $341.05 $539.80 $733.51 $880.77

275 ($108.96) $104.87 $313.27 $512.02 $705.73 $852.99

300 ($136.73) $77.09 $285.49 $484.24 $677.96 $825.21


Number Born Alive/Litter 1 2 3 4 5 6

11.25 ($172.51) ($39.26) $90.62 $212.83 $331.94 $406.49

11.50 ($160.70) ($15.94) $125.16 $258.30 $388.07 $473.01

11.75 ($148.89) $7.38 $159.69 $303.77 $444.20 $539.52

12.00 ($137.08) $30.70 $194.23 $349.24 $500.33 $606.04

12.25 ($125.27) $54.02 $228.77 $394.72 $556.46 $672.55

12.50 ($113.46) $77.34 $263.31 $440.19 $612.59 $739.07

12.75 ($101.66) $100.66 $297.84 $485.66 $668.72 $805.59

13.00 ($89.85) $123.98 $332.38 $531.13 $724.85 $872.10 13.25 ($78.04) $147.30 $366.92 $576.60 $780.97 $938.62

13.50 ($66.23) $170.62 $401.46 $622.08 $837.10 $1,005.13

13.75 ($54.42) $193.94 $436.00 $667.55 $893.23 $1,071.65

14.00 ($42.61) $217.26 $470.53 $713.02 $949.36 $1,138.17

Net Present Value by Parity when the Number of Pigs Born Alive Varies


Net Present Value by Parity when the Market Hog Price Varies

$/CWT (kg) for Hogs 1 2 3 4 5 6

$ 39.00 (0.86) (332.00) (356.03) ($379.45) ($404.91) ($429.72) ($478.94)

$ 41.00 (0.90) (271.46) (236.03) ($201.49) ($170.90) ($141.08) ($141.18)

$ 43.00 (0.95) (210.92) (116.03) ($23.53) $63.11 $147.56 $196.58

$ 45.00 (0.99) (150.38) 3.98 $154.43 $297.12 $436.20 $534.34

$47.00 (1.04) (89.85) 123.98 $332.38 $531.13 $724.85 $872.10 $ 49.00 (1.08) (29.31) 243.98 $510.34 $765.14 $1,013.49 $1,209.86

$ 51.00 (1.12) 31.23 363.98 $688.30 $999.15 $1,302.13 $1,547.63

$ 53.00 (1.17) 91.77 483.98 $866.25 $1,233.16 $1,590.77 $1,885.39


Net Present Value by Parity when the Feed Costs per Market Pig

Feed Cost/Head 1 2 3 4 5 6

$ 54 113.48 527.02 930.07 1,317.08 1,694.28 2,006.51

$ 58 72.82 446.41 810.53 1,159.89 1,500.39 1,779.63

$ 62 32.15 365.80 691.00 1,002.70 1,306.51 1,552.75

$ 65 (8.51) 285.19 571.46 845.51 1,112.62 1,325.87

$ 69 (49.18) 204.59 451.92 688.32 918.73 1,098.98

$ 73 (89.85) 123.98 332.38 531.13 724.85 872.10 $ 76 (130.51) 43.37 212.84 373.94 530.96 645.22

$ 80 (171.18) (37.24) 93.31 216.75 337.07 418.34

$ 83 (211.84) (117.85) (26.23) 59.56 143.19 191.46

$ 87 (252.51) (198.45) (145.77) (97.63) (50.70) (35.42)


Net Present Value by Parity When the Discount Rate (Interest Rate) Varies

Discount Rate 1 2 3 4 5 6

4% ($83.25) $134.39 $348.59 $559.43 $766.94 $971.19

6% ($85.20) $128.94 $338.06 $542.28 $741.71 $936.47

8% ($87.12) $123.61 $327.80 $525.66 $717.38 $903.16

10% ($89.01) $118.39 $317.80 $509.55 $693.92 $871.20

12% ($90.87) $113.27 $308.06 $493.93 $671.29 $840.52

14% ($92.70) $108.27 $298.57 $478.79 $649.45 $811.05

16% ($94.50) $103.36 $289.32 $464.09 $628.36 $782.74


Sensitivity Analyses Summary

• A 30% change in initial gilt purchase price to change the Parity at which a positive Net Present Value is attained by 1 parity

• A 11.5% (increases from parity 2 to parity 3) to 15% (decreases from parity 2 to parity 1) change in number born alive changes the parity at which a positive Net Present Value is attained.

• A 8.5% change in market hog price to change the parity at which a positive net present value is attained by 1 parity.

• A 9.6% change in total feed cost to finish a market hog to change the parity at which a positive net present value is attained by 1 parity.


Internal Rate of Return

• Definition – Internal rate of return is a value commonly used in the capital budgeting process. It represents the discount rate (interest rate) which results in the Net Present Value equal to zero.

• In general the greater the Internal Rate of Return, the more desirable the project.

• Internal Rate of Return is frequently used to rank a number of projects an individual or firm are evaluating.

• If all other factors are equal among the various projects, the project with the greatest IRR would probably be considered the best and undertaken first.

• IRR is sometimes referred to as "economic rate of return (ERR)


Internal Rate of Return by Parity for Varying Replacement Gilt Purchase Price

Prices for Gilts 1 2 3 4 5 6

125 24.41% 85.42% 105.96% 113.52% 116.60% 117.63%

150 9.09% 67.81% 88.86% 97.03% 100.56% 101.80%

175 -2.73% 53.97% 75.38% 84.08% 88.01% 89.47%

200 -7.13% 48.75% 70.29% 79.19% 83.28% 84.83%

225 -19.78% 33.49% 55.38% 64.91% 69.51% 71.36%

250 -26.13% 25.67% 47.71% 57.57% 62.46% 64.47%

275 -31.49% 18.96% 41.11% 51.26% 56.41% 58.59%

300 -36.07% 13.14% 35.36% 45.77% 51.16% 53.49%


Using Today’s Feed and Market Hog Prices

** Market Hog Feed Cost per head $106.00

Price of Gilt $ 257.80 Number of Pigs Sold/Litter 11.49Annual Discount Rate 6.50% Weight Sold, cwt. 2.70Parity Discount Rate 2.60% $/cwt. Hogs $ 71.82 Percentage of gilts purchased that do not enter the breeding herd 10% Revenue/Litter $2,227.37 Development Feed Costs $ 54.25 Feed Cost/Litter $1,374.91 Other Development Costs $ 7.50 Other Expenses $ 292.67 Total Development Costs $ 61.75 Net Income/Litter $ 559.80 Total Gilt Price $ 331.35 Number of sows 2,500 Number of Pigs Born Alive/Litter 13 Litters/sow/Yr 2.5Birth to Weaning Death Loss 8.00% Total Litters/Yr 6,250

Nursery Death Loss 2.00% Average Parity of Farrowed Sows 2.50Grow-Finish Death Loss 2.00% Years of Sow 1.00Death Loss on Sows 6.00% Weight of Sow @ Culling, lbs. 450Wt of Gilts @ Culling, lbs. 330 $/Cwt for Culls $61.00$/cwt for Cull Gilts $ 71.82 Cull Value $ 258.03 Revenue for Cull Gilts $ 23.70


Net Present Value by Parity when the Price of Replacement Gilt Varies

Number Born Alive/Litter 1 2 3 4 5 6

11.25 $319.26 $715.67 $1,102.04 $1,471.58 $1,831.76 $2,115.91 11.50 $338.27 $753.22 $1,157.65 $1,544.79 $1,922.12 $2,223.00 11.75 $357.28 $790.76 $1,213.26 $1,618.00 $2,012.49 $2,330.09 12.00 $376.29 $828.31 $1,268.86 $1,691.21 $2,102.86 $2,437.18 12.25 $395.31 $865.85 $1,324.47 $1,764.42 $2,193.23 $2,544.28 12.50 $414.32 $903.39 $1,380.07 $1,837.63 $2,283.60 $2,651.37 12.75 $433.33 $940.94 $1,435.68 $1,910.84 $2,373.96 $2,758.46 13.00 $452.35 $978.48 $1,491.29 $1,984.05 $2,464.33 $2,865.55 13.25 $471.36 $1,016.03 $1,546.89 $2,057.26 $2,554.70 $2,972.64 13.50 $490.37 $1,053.57 $1,602.50 $2,130.47 $2,645.07 $3,079.73 13.75 $509.39 $1,091.12 $1,658.10 $2,203.68 $2,735.44 $3,186.82 14.00 $528.40 $1,128.66 $1,713.71 $2,276.89 $2,825.80 $3,293.91 14.25 $547.41 $1,166.20 $1,769.32 $2,350.10 $2,916.17 $3,401.00 14.50 $566.43 $1,203.75 $1,824.92 $2,423.31 $3,006.54 $3,508.09 14.75 $585.44 $1,241.29 $1,880.53 $2,496.52 $3,096.91 $3,615.19


Efficiency Oppornities

• Tremendous efficiency opportunities– As you go right on the sensitivity tables – increasing

the number of parities produced– As you go up (cost) or down (productivity) depending

on the trait on the sensitivity tables - decreasing price or increasing productivity

– The ULTIMATE going across and down improving longevity and improving price


Summary

• Improving sow productive lifetime represents an area where improved economic efficiency can easily be attained

– Producing more with less

– Improved throughput from each sow in the herd• Improving sow productive lifetime can increase gross

income and net profitability

• Focus on management practices that improve longevity

• More sows should be culled because of poor performance rather than reproductive reasons.


Those Interested in The Spreadsheet

Spreadsheets available at: http://www.ipic.iastate.edu/software.html

Breed – to – Wean – English measurementsBreed – to – Wean – Metric measurementsFarrow – to – Finish – English measurementsFarrow – to – Finish – Metric measurements

EnglishChinesePortugueseSpanish

Iowa Pork Industry Center 515-294-4103Porkline (Iowa Only) 800-808-7675e-mail me at [email protected]


What is possible?

TRAIT10 LITTER

AVG 23 LITTER AVG TRAIT 10 LITTER AVG 23 LITTER AVG

NBA 12.10 10.57 ADJ WWT 138.1 lb 152.1 lb

SB 1.00 1.61 AGE 15.9 d 17.6 d

NAT 10.0 9.70 W2E 6.56 d 6.1 d*

WEANED 9.30 9.10 FI 136 d 149.1 d*

DOB: 8/2/1997

Weaned litter 23 on February 1, 2007


8th parity with 23 piglets born

What is possible?


Thank You For Your Attention!

Questions?

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