VDPAM 310x Basic Economic Considerations in Production Medicine

1. VDPAM 310xBasic Economic Considerationsin Production Medicine Dr. Locke Karriker, DVM, MS, DACVPM Veterinary Diagnostic and Production Animal Medicine Iowa State University College of Veterinary Medicine

2. Objectives • Understand key drivers of production decisions • Understand general global, regional, and local influences on production economics • Utilize key concepts and definitions from the reading assignment in today’s discussion • Begin developing the tools to apply economic considerations to health recommendations

3. Economics: The “hog pen” definition… • Economics is the practice of determining the most efficient use of resources to achieve a desired objective. • The universal language of economic study and comparison of potential options is financial with money as the basic unit. • A large part of production economics is translating biological performance and the impact of health interventions into financial terms so that other stakeholders in the farming process can understand them.

4. Step 1 Understand the global environment and national trends in production The global environment is driven by consumers and their politics, and presents opportunities for producers to succeed or fail depending on their ability to contribute to the global demand. Toothbrush Example

5. Economics and Structure Of the U.S. Swine Industry James Kliebenstein, Ph.D. Professor of Economics Iowa State University Adapted from slides by Dr. Ron Plain

6. 2004 was the 13th consecutive record year for U.S. exports

7. A closed border could be devastating. Example: recent re-instatement of Japanese ban on beef – employees fired, company banned from exporting indefinitely 2004 was the 13th consecutive record year for U.S. exports

8. Who Profits?

9. Pork: Retail Price & Shares Producers & packers are losing market share

10. Farmer’s Share of Consumers Pork Dollar

11. Packer’s Share of Consumers Pork Dollar

12. Processing-Distribution-Retail Share of Consumers Pork Dollar

13. Iowa Farrow to Finish Profits, 1994-2005 Source: John Lawrence, Iowa State University

14. Packers are moving closer to the consumer by doing further processing including case-ready meat and developing their own brand names

15. Impact on Industry Structure

16. The number of U.S. hog farms has declined each year since 1980 In 2004 there were 60,830 farms that owned hogs and 69,420 farms that raised hogs. Source: USDA-NASS

18. Fewer Decision Makers with Bigger Impact!! • Crates versus stalls • Scaling back sow herd • Ethanol mandate at the global level

19. How do I keep up??? Daily Market Summary from USDA Daily Livestock Report from CME

20. Seasonality

21. November pork production averaged 20% higher than July

22. November hog prices averaged 20% lower than July

23. Cost of Production

24. Cost of Slaughter Hog ProductionIowa State University Calculations, 1987-2005 Source: John Lawrence, Iowa State University

25. System structure impacts cost of production • Extensive: LOWER capital investment, LOWER fixed costs, LOWER efficiency, HIGHER variable costs • Intensive: HIGHER captial investment, HIGHER fixed costs, HIGHER efficiency, LOWER variable costs

26. Extensive production

27. Intensive production

28. The Makeup of a 2,400 Sow Farm • Facility cost • $ 1.7 Million • Staff • 12 = 9 Team members, 2 DTL’s , 1 Farm manager. • Animal Inventory cost • $ 432,000.00 • Profit potential at budget • $ 739,530.00

29. Average Annual Costs • Personnel Cost • $ 265,560.00 • Property Cost • $ 52,578.00 • Utility and Service Cost • $ 110,298.00 • Vet/Med Cost • $ 44,856.00 • Supply Cost • $ 37,902.00 • Feed Cost • $ 30,000.00

30. Total Variable / Controllable Cost $ 532,194.00 What is the Cost Management Ability ? $23.00 Wp vs. $15.00 Wp = $450,000.00

31. Step 2 Understand the general drivers of local production These are the conditions that drive daily operational decisions and are the broad categories that have the most impact on the economics of individual production systems

32. Key drivers of local production • Value • Does anybody want what you have? What is it worth to you? • Animal flow • Life cycle is long relative to other production enterprises • Throughput • How much production is required by market or farm objectives? • Target Market • Niche such as antibiotic free, taste, “welfare friendly” • Commodity • Export • Health • Where Veterinarians impact all the rest

33. “How do you get paid?”

34. “How do you get paid?” • Explains the producers interpretation of VALUE • Profitability? • Market niche? • Taste differentiation • Brand name • Antibiotic free • Adding value to crop operations?

36. “How do you get paid?” ROI(A) – Return on investment (assets) Cash Flow Equity Net Profit # / pig space $ / target head Number sold

37. Animal Flow and Throughput You will see more on this later in the course, but a few relevant points now…

38. Baseline Performance for Breakeven

39. 2% worse mortality and culls means must breed and farrow more…

40. …or lose money…

41. …or lose money… What happens to this if commingle here?

42. …compensating with farrowing rate doesn’t work.

43. Effect of changes in ADG and F:G on profitability

44. 0.1 # less ADG

45. 0.1 # more F:G

46. Both

47. How do veterinarians provide better throughput and consistent, predictable, pig flow? More! Heavier! Faster!

48. Relationship between health, pig flow, and throughput Keep pigs alive Keep pigs on feed Eliminate energy wasters: Homeothermic responses Immune stimulation

49. Relationship between health, pig flow, and throughput Keep pigs alive Keep pigs on feed Eliminate energy wasters: Homeothermic responses Immune stimulation Health Issues!

50. Cost of Mortality • Older mortality is more expensive • Highly variable from system to system • Nursery: • 1% change is equivalent to roughly $0.50 - $0.60 per head remaining in the group • Finisher: • 1% change is equivalent to roughly $1.15-$1.30 per head remaining in the group