Economic Differentiation Through Lifetime Production

1. Economic Differentiation ThroughLifetime Production Ken Stalder, Professor Department of Animal Science Iowa State University, Ames, IA 50011-3150

2. 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?

3. 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

4. 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

5. 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

6. 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.

7. Different sow longevity traits • 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

8. Different sow longevity traits • 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

9. 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.

10. 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.

11. Costs Associated with Replacinga 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

12. What does the future lifetime sow productivity look like

13. 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

14. 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

15. Future Productivity

16. Fixed and Variable Expenses

17. Feed Costs

18. Feed Costs cont’

19. Parity Adjustment

20. 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

21. Expectations in Cambouroughs • 60 pigs weaned per lifetime -14 Total Born, 13 Born Alive, 12 Weaned • Parity 5 average age at removal • 30 Pigs/Sow/Year

22. What does all of this information get you?

23. 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.

24. What is Net Present Value • 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).

25. What is Net Present Value • 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.

26. 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.

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

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

29. Net Present Value by Parity when the Market Hog Price Varies

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

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

32. 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.

33. 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)

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

35. Using Today’s Feed and Market Hog Prices ** Market Hog Feed Cost per head $106.00

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

37. 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

38. 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.

39. Those Interested in The Spreadsheet Spreadsheets available at: http://www.ipic.iastate.edu/software.html • Breed – to – Wean – English measurements • Breed – to – Wean – Metric measurements • Farrow – to – Finish – English measurements • Farrow – to – Finish – Metric measurements • English • Chinese • Portuguese • Spanish Iowa Pork Industry Center 515-294-4103 Porkline (Iowa Only) 800-808-7675 e-mail me at stalder@iastate.edu

40. What is possible? DOB: 8/2/1997 Weaned litter 23 on February 1, 2007

41. What is possible? 8th parity with 23 piglets born

42. Thank You For Your Attention!Questions?