KEYS TO COST MANAGEMENT

By: David R. Stender, Iowa State University

Managing costs is one of the most important elements in earning a living on a small farm. Most farmers who raise heritage hogs assume that selling their hogs at premium marketing prices will improve profits; yet high production costs may negate any market price premium. Fortunately, many costs are well within the control of the farmer.

The cost structure of a small swine operation is influenced by a wide range of factors. Cost structure can be divided broadly into feed costs, and non-feed costs, which include labor, fuel, veterinary costs, and so on. Feed typically accounts for 2/3 of all expenses, and feed costs are directly tied to the number of animals raised. If fewer animals are raised, feed costs go down, and vice versa.

Some non-feed costs are fixed. Fixed costs remain constant and are not dependent on the number of pigs produced. An example of this is tractor payments. Because those costs are fixed, the impact on profitability of the pig operation depends on the number of animals, and may depend on other enterprises on the farm that use the same resource. For example, the percentage of that tractor payment cost per pig is lower if the farm has more pigs. The percentage of the tractor payment per pig is also lower if the tractor is used for other farm enterprises, such as harvesting hay for sheep, or preparing fields for vegetable crops, because some of that cost is assigned to those enterprises.

Cost structures may vary greatly between farms. In a 2007 Iowa study, the difference in cost structure between the most profitable and least profitable niche swine herds was about $30 per head sold. The wide spread between profitable and unprofitable farms makes cost of production a critical component of financial success.

How many pigs does an operation need to produce to earn $30,000/year? The answer may be in keeping good financial management records. There are two major reasons for keeping financial management records.

First, financial management records should be kept to benchmark management practices and the operation’s cost of production. Benchmarking provides a way to understand a farm’s normal costs, and allows for comparisons to other niche farms and even commodity production. Farmers can learn how their farm performs relative to other niche herds, and even compare their costs to what is possible in a top commodity herd.

Second, financial management records can be used to identify which cost reductions will make the most difference to the profitability of the operation. To help identify the most influential cost factors for raising pigs, a record keeping program for niche producers was developed by Iowa State University in 2006 and 2007. Niche swine producers used this record program to track and benchmark costs, and that information helped them to find targets for cost reduction.

When records from the participating farms were analyzed, no single factor could predict profitability, but, rather, multiple factors were involved (Table 1). Different factors can be problematic for different farms. In general, the farms that were consistently at or above average at controlling costs in several areas were the high profit farms.

Table 1. Major Factors that Influence Profitability

Note: data on each line come from different sets of farms	Top 15 farms	Lowest 15 farms	Difference between top and lowest farms per Cwt
Labor (hrs per Cwt)	0.47	1.28	$12.15
Operating costs* ($ per Cwt)	$4.19	$13.06	$8.87
Feed efficiency (lbs feed/Cwt)	344	482	$8.75
Pigs weaned per litter	7.8	5.6	$8.52
Price of feed ($ per ton)	$105.40	$143.60	$7.03
Litters weaned per sow per year	1.9	1.1	$6.93
Selling price for market animals ($ per Cwt)	$51.90	$45.06	$6.84
Fixed costs ($ per Cwt)	$0.53	$5.73	$5.20
Pig death loss,  weaning to harvest (%)	2.3%	14.5%	$3.07

Cwt = 100 lbs live weight
*Operating costs (for this study, these included veterinary costs, utilities, fuel, bedding, and financial charges on operating loans.)

Labor, operating, feed, and fixed costs were very important to farm profitability in this study. Farmers can track and review expenses, then compare against the benchmarks established in the study to determine which of these costs may help profitability. For example, finding efficiencies that save labor or a lower cost source of feed are ways to reduce expenses. When searching for ways to control non-feed costs, both the short and long-term consequences should be kept in mind. For example, facility improvements may reduce labor, but the facility labor costs must be considered to determine whether there will be a long term cost benefit or not.

The study also offers some clear management guidance:  improving feed efficiency (for example, reducing wastage), improved litter size, improved weaning rates, and reducing mortality are all areas where farms can improve their profitability.

Because feed cost is a driving factor, most small farms appreciate a simple approach to estimating cost per animal. For example, feed costs per market pig can be estimated using 15 bu corn (840 lb grain); 120 lb soybean meal (SBM); 20 lb vitamin/mineral base mix (VTN). These estimates include feed for a breeding herd. An estimate of at least 75 dollars per head sold is used for non-feed costs. In this cost estimate method, changes in feed ingredient prices can be easily factored into the total cost estimate (Table 2).

Table 2. Quick and Easy Feed Cost Estimate

	Cost structure, example 1		Cost structure, example 2		Difference
Corn price	Per bushel	Per 15 bu.	Per bushel	Per 15 bu.
	$6	$90/head	$4	$60/head	$30/head
SBM price	Per ton	Per 120 lb.	Per ton	Per 120 lb.
	$500	$30/head	$400	$24/head	$6/head
VTM	Per ton	Per 20 lb.	Per ton	Per 20 lb.
	$1000	$10/head	$700	$7	$3/head
Total feed cost		$130/head		$91/head	$39/head
Non-Feed cost minimum		$75/head		$75/head
Total cost estimate		$205/head		$166/head	$39/head

These two examples clearly show the impact of feed ingredient cost changes, with the price of corn having the largest impact. In some regions of the country, it may make sense to compare different energy sources, such as wheat or milo, that may be substituted for corn.

Summary of Key Cost Management Areas

1. Controlling feed costs will have the biggest impact on profitability.
   1. Feed waste can be very expensive and is not an option for systems feeding high priced feed.
   2. Processing feed correctly is very important to the bottom line because it reduces the amount of feed needed to meet the pigs’ nutritional needs.
   3. Feeding the sow only the feed needed to maintain her weight and milk yield is critical. Furthermore, some heritage breeds are prone to fattening. Feed costs can be reduced and productivity improved through proper weight management.
2. Maintaining a healthy herd is essential. Management of colostrum, early lactation environment, biosecurity, healthy air, pig comfort (dry bedding, etc.), breaking disease cycles, and a discipline of rigorous parasite and disease control programs are all niche management strategies that have the potential to improve herd health and improve profitability.
3. Optimizing reproductive efficiency is important for both feed and non-feed cost. For example, a sow consuming 450 lb of feed at $0.20/lb of feed during lactation (15 lb a day for 30 days) costs $90 per litter. This cost must be assigned to each pig that reaches market weight. A litter of 10 piglets carries less cost than a litter of 5 piglets. At $90 that is a $9/head difference in cost for just one litter. The same cost distribution applies to non-feed costs of purchasing, housing and management of each sow. From the non-feed perspective, $500/year cost per sow is $50 per piglet from a sow producing 10 piglets, and half that cost for a sow producing 20 piglets in a year. Reproductive efficiency can be improved through good husbandry and culling.
4. Managing non-feed costs such as labor in the context of their impact on production, health, and long term profit can help control costs. If an extra $500 is spent per sow per year in order to get 20 piglets from that sow, the non-feed cost per pig does not change. Therefore, for some farms with low non-feed costs, small herds may be cost-competitive with larger herds.
5. Understanding genetics may be important in cost management.
   1. Traits such as foraging ability, feed efficiency, mothering ability, longevity, and hardiness affect costs and may impact the farm’s choice of breed, and selection of breeding stock.
   2. Some breeders use hybrid vigor to their advantage. Terminal (F1) crosses between two heritage breeds can still be called Heritage. Just keep in mind that purebred animals must also be maintained to replace breeding stock and conserve heritage breeds.
   3. Genetics also may affect income. Effectively marketing the unique characteristics of heritage breeds can increase value (marketing price).

Understanding, and thus controlling, the costs for small herds is necessary to allow small numbers of pigs the potential to earn a living.  There is no “best method” of cost management.  In the Iowa study, some of the most productive herds were low profit. Instead, each farm must determine the best way to raise pigs without increasing costs. This may be to improve feed conversion without adding to feed cost, to lower death loss without using lots more heating fuel or labor per pig, or to improve the number of pigs per sow per year without an expensive facility improvement or a large increase in labor per litter.

In summary, the Iowa niche production study identified these key factors where niche producers should focus to control their costs:  minimizing feed wastage; proper feed processing; optimum sow feeding; managing for high herd health; improving reproductive performance; and finding a cost effective genetic program that fits your marketing plan. Controlling these factors helps hog growers achieve their goals.  Maintaining records and benchmarking are not just for the big farms, but are essential for farms of any size that want to lower costs and increase profit margins.

 For more help understanding costs on your farm, check out these links:
Results from the Iowa record keeping project:
http://lib.dr.iastate.edu/ans_air/vol656/iss1/87/
Iowa Pork Industry Center publications
Managing Feed Costs
Managing Non-feed Costs
Production Flow
www.ipic.iastate.edu/publications.html