ECONOMIC FEASIBILITY OF OUTDOOR
WEANED PIG FARMING IN WEST TEXAS
by
RONALD M. MUTAI, B.S.
A THESIS
IN
AGRICULTURAL AND APPLIED ECONOMICS
Submitted to the Graduate Faculty of Texas Tech University in Partial Fulfillment of the Requirements for the Degree of
MASTER OF SCIENCE
Annroved
Chairperson of the Committee
Accepted
Dean of the Graduate School
May, 2002 ACKNOWLEDGEMENTS
I would tike to thank my advisor Dr. Emmett Elam for his careful guidance and his unending advice. His ideas, insights, and inspiration have been invaluable to this research. 1 would also like to recognize my committee members Dr. John McGlone, Dr.
Terry Ervin, and Dr. Conrad Lyford for their active participation in my research project.
1 give special recognition to the Texas Tech University farm manager at Idalou (Jeny
Smith), and the graduate students at the Texas Tech Animal and Food Sciences
Department for their help with answering many technical questions about outdoor pig farm operations and estimations.
Thanks go to the College of Agricultural Sciences and Natural Resources, to the
Department of Agricultural and Apphed Economics, and to the Department of Animal and Food Sciences for providing the facilities that enabled me to complete my study.
Finally, I would like to thank my parents Stephen and Honesty Mutai for all their sacrifices and imending love. Special thanks go to my extended family for their moral support. TABLE OF CONTENTS
ACKNOWLEDGEMENT 11
ABSTRACT y LIST OF TABLES vii LIST OF FIGURES ix
CHAPTER I. INTRODUCTION 1 Specific Problem Statement 9 Objectives 10 II. LITERATURE REVIEW 12 Economic Engineering Method of Cost Estimation 12 Feasibility Studies 15 Outdoor Hog Production 23 SEW (Segregated Early Weaning) Pigs 30 Return on Agricultural Assets 32 Stmctural Changes in the Pig Industry 35 Impact Analysis 37 m. CONCEPTUAL FRAMEWORK 39 Cost Estimation 39 Weaned Pig Pricing and Resource Allocation 40 IV. METHODS AND PROCEDURES 44 General Overview of the Farm 44 The Economic-Engineering Cost Estimation Approach of Cost Estimation 51 Weaned Pig Pricing 63 Net Income and Financial Analysis 64 Comparison of Pig Farm Returns 65
ni Estimation of Economic Impacts on West Texas 69 V. FINDINGS 71 Required Investment 72 Operating Cost Estimates 74 Net Income and Financial Analysis 77 Sensitivity Analysis 82 Comparisons 85 Economic Impact 96 VI. SUMMARY AND CONCLUSIONS 98 Limitations of the Study 99 Further Sttidy Needs 99 REFERENCES 101
IV ABSTRACT
Prior studies have reported varying rates of return for hog farms, ^^•ith high returns reported in some studies (Dodson, 1994; Cline et al., 1995). However, none of these studies has analyzed the economic feasibility of outdoor weaned pig farming in the West
Texas region (weaned pigs are sold at an early age, 15-21 days). The objective of this research project was to evaluate the economic feasibihty of an outdoor weaned pig farm in the West Texas region. The research addressed the question of how pig farming will mesh with row crop agriculture in the region and how it might gamer investment capital from financial investors.
Four model outdoor weaned pig farms were specified and the cost stmcture of the farms was estimated using the economic engineering method of cost analysis. .A-\'erage cost was fotmd to decrease as farm size increased from 300 sows to 5,000 sows, indicating economies of size in production. The outdoor pig farm returns were negative for the 300-sow farm but increased as farm size increased. The 5,000-sow model farm had an estimated annual return on investment of 24%. By comparison, the return on a cotton farm is about half that plus cotton farming has greater risk (more variability in return) than a pig farm. In addition, pig farming had a comparable return to stocks (S&P
Composite Index) with about one-third the risk.
This study found that outdoor weaned pig farming in West Texas is an economically feasible agricultural investment for large size farms (5,000 sows and larger). Pig fanning provides an alternative investment to cotton fanning or a secondary enterprise with cotton farming. The addition of cotton and pig farming can reduce the risk in a single enterprise farming operation. There is potential to obtain investment capital for pig fanning from non-agricultural investors, since pig fanning can be used to reduce risk in a financial portfoho.
VI LIST OF TABLES
4.1 Price and Costs of Inputs 49
4.2 Equipment and Description 52
4.3 Operating and Depreciation Costs at the 300-Sow Farm 56
4.4 Operating and Depreciation Costs at the 600-Sow Farm 57
4.5 Operating and Depreciation Costs atthe 1,200-SowFann 58
4.6 Operating and Depreciation Costs
at the 5,000-Sow Farm 59
4.7 Assumptions Used in the Study 60
4.8 Weaned Pig Price Regression and Estimates 62
4.9 Breed-Wean ISU Business Records 66
5.1 Required Investments ($'s) in Land, Machinery and Equipment, Breeding Stock, and Operating Inputs for Entire Farm and Per-Sow by Farm Size 73 5.2 Annual Budgets of Revenue, Costs, and Returns by size of Operation 78
5.3 Annual Budget Returns on Average Investments, by Farm Size 80
5.4 Cash Flow Budgets ($'s) and Internal Rate of
Rettim (IRR) for 5,000 Sow Operation with 100% Equity 81
5.5 Sensitivity Analysis 84
5.6 Investment Cost of Indoor and Outdoor Weaned Pig Operations 86
Vll 5.7 Performance Measures for West Texas, Outdoor Pig Farms, by Size and Average Performance Measures For Breed-to-Wean, Iowa State University Swine Business Records 90
5.8 Means, Standard Deviation (SD), and Conelation Coefficients Between Returns for Cotton Farming and Outdoor Pig Farming 90
5.9 Means and Standard Deviations of Financial Investments and Outdoor Pig Farming and Beta Value of Outdoor Pig Farming 95
Vlll LIST OF FIGURES
3.1 Cost versus Pigs Produced 43
4.1 Enlargement of Radial Showing Gestation Huts
(Rectangle), and Wallow (Round) 45
4.2 General Layout of the Idalou Farm 46
5.1 Average Costs by Production Level 75
5.2 Feed Cost, Labor Cost, and Depreciation 76
IX CHAPTER I
INTRODUCTION
Farmers in the Texas High Plains are being forced to economize on the amounts
of water they can use on their farms. Over the years, the Ogallala Aquifer water levels have declined, reducing the availability of water and increasing the pumping cost to
capture the water for farm application. Cotton production, which predominates in the
Texas high Plains, is highly dependent on rainfall or irrigation water. With the reduced
availability and higher cost to obtain water, there is need for alternative farming
enterprises that economize on water use. One altemative that has been researched at
Texas Tech University is outdoor pig farming. With outdoor pig farming, there is need
to irrigate the fields to maintain grass cover under the animals (to avoid being classified
as a Confined Animal Feeding Operation by EPA), and to provide water and watering holes (wallows) for the pigs to fmd mud to cool down in the summer. Compared to
cotton farming, however, pig fanning uses considerably less water (pasture for a pig farm
requires 3 acre inches compared to cotton farming that requires 6 acre inches or more).
Thus, any change toward pig farming in place of cotton farming could conserve the
hmited water in the Texas High Plains region.
The earliest knovm records of modem outdoor pig farms are on hog farming in
England. In England, people usually had one or two pigs grazing on small plots and they would let them graze freely after harvesting their subsistence crop. Historically, pigs
have been scavengers who live and forage in forests, woods and orchards. Outdoor hog keeping can be traced back to tiie middle of the ninth century BC when pigs were first domesticated (Thornton, 1990). The industrial revolution in England occurred during the eighteenth century, and due to better living standards, there was a dramatic increase m population. There was less space for pigs to roam outside and this led to the first step toward pig confinement. Pigs were confined to areas near their food supply, which could be near homes, agricultural sites or industrial sites such as breweries (Thornton,
1990).
Growth of pig populations in England was also evident in places where cereal crops, mainly barley and oats, were produced, examples of this being East Anglia,
Yorkshire and the southeastem counties in England. Commercial breeding of pigs can be traced to brewers who bought lean weaned pigs that were about fifteen weeks old.
They would fatten them on grain and wash, which is the grain residue obtained after distilling liquor. After fattening they would then sell their pigs through valuable, over priced confracts, direct to the Royal Navy. The small farmers usually complained bitterly of losing their fraditional markets that were being taken away by commercial breeders (Thomton 1990).
Towards the end of the nineteenth century and the beginning of the twentieth century, with population growth other industrial by-products like those obtained from bakeries were available and widely used to feed pigs mainly at the edges of towns.
During the 1920s in England, confinement buildings, modeled after the Danish-type buildings (closed bams), were built for fattening pigs. During the same time, animal feed compound businesses developed in cities such as Liverpool and Bristol. They used imported maize, barley and wheat from North America. Improved road and railwa>' systems facilitated the transportation of animal feeds to farms throughout the country.
This led to development of supply chains that exist even today.
From 1954 onwards, pig production in England moved towards confinement at all stages of production. In a period of 20-25 years, pigs moved ahnost wholly indoors into specialized buildings. Specialization led to breeding sows being housed in yards with individual feeders, which eventually led to individual sow stalls and tether systems.
Weaned, growers and fattening pigs were housed in insulated buildings. By the 1970s, the pig industry was becoming increasingly specialized with fewer and larger units accounting for a large proportion of the total output. According to Thomton (1990), by the 1980s the British industry could have been considered to be operating on a high-cost basis but with high outputs and leading the world in the application of technology and technical developments.
The present day outdoor pig production system was developed by Richard
Roadnight on his farm at Britwell Salome near Watlington in Oxfordshire, England.
Present day methods depend on the sound principles he practiced and popularized amongst a small group of pioneers. In the 1950s, he used sheep for his rotations on his
2,500-acre barley farm. His search for an altemative led to a decision to try an outdoor herd of breeding sows.
The Roadnight system was based largely on a large herd of 400 sows that would farrow twice a year in March and September, thus allowing the young to avoid the worst of the winter weather. The March bom pigs could be sold off the fields as weaned pigs later in the year, and September bom litters could be moved on to be fattened in straw-
yards. The system worked extremely well and was regarded as a low-cost, high-output
system.
At that time, major drawbacks to the system included laborious methods of
paddock fencing with stakes, pig netting and barbed wire. The cost of fencing was
relatively high since extra fencing was needed to prevent the hogs from finding their way
off the farms.
The Roadnight system and slight variations of it were widely adopted in various
parts of the United Kingdom, especially the southem cotmties and as far north as
Aberdeen. In the late 1960s, several large outdoor pig units could be seen directly under
the flight path as the landing approach was made at Aberdeen Airport. This outdoor
method was favored due to its profitability. Compared with the indoor system,
Roadnight's outdoor system provided strong healthy weaned pigs, lower labor costs and a
low capital outlay. On the other hand, drawbacks, including low productivity, difficulty
in controlling the herd, and unproductive sows, took long to recognize.
A close look at other countries revealed that the Roadnight (outdoor) system is
still in use. In the United States, pig production is now concentrated in the Com Belt
states of the Midwest, but this was not always the case. Pigs emigrated from Europe to the Americas through the Caribbean, with the early pioneers in the fifteenth and sixteenth centuries, and quickly made themselves at home. British pigs arrived with the early colonists in the New England states, spread to the mid-Atlantic colonies and
Permsylvania, which became a great hog colony in the second half of the nineteenth century, hi the early years of pig fanning in the United States, pigs were raised in A- frame huts outdoor in the Midwest. Farmers would grow com and when it was more profitable to feed the com to hogs (or cattle) than to sell it, they would feed hogs (or catfle). That is, farmers would raise hogs and other livestock like cattle as a potential avenue to market grain when grain prices were low.
Much of the industriahzation in the pig industry (transition into today's specialized and commercialized enterprises) has occuned from an era 75 years ago when nearly every farm raised some hogs (Rhodes, 1995). The period from the Great
Depression until 1970 brought the commerciahzation of hog production. Farmers largely stopped butchering hogs for home consumption. A rapid transition of hog production into partial or total confinement took place around the 1970s.
In the 1970s and 1980s hogs were typically produced on fanow-to-finish farms, that is, farms with a breeding herd where the pigs are raised from birth to market
(Martinez, 1999). More recently the trend has been to produce pigs at more specialized farms at three different sites, separated by location. The first site would be used for breeding, gestation, and fanowing. After weaning, the pigs would be moved to a second site, a nursery facility where they would receive special diets and care. Once the pigs reach an age of about 8-10 weeks and 40-60 pounds, they are transported to the finishing facility, the third site, where they are fattened to market weight.
Environmental problems have risen with the confined hog operations and this has caused researchers and farmers to take a second look at the mostly forgotten, outdoor production method so popular at an earher time. "Not in my back yard" (NIMBY) opposition has become very real for large and even for smaller producers seeking to
locate or expand in the Midwest Combelt (Rhodes, 1995). While it may not be known
exactly what effect NIMBY forces will have on pig production, it is conceivable that any
sizeable production will move West, to more sparsely-populated and cheaper range land
where it will be more economic to operate pig farms without much affront to the nostrils
of the residents. Outdoor hog fanning offers an ahemative that requires less up front
investment and can be enviroimientally friendly and animal friendly if done well. In the
last decade we have seen interest in outdoor pig farming grow as the Midwest faces
environmental problems with their hog farms. Studies have been undertaken by different
organizations on outdoor hog farming and more recently Texas Tech University and Dr.
John McGlone initiated the Low Input, High Output Sustainable Pork Production project,
which I will be looking at in more detail in my study.
One problem that may spur interest in outdoor pig farming in West Texas is the
arrival of the boll weevil in the Texas High Plains. Over the last few years, a significant
increase in the levels of boll weevil infestation has occuned. A study by the Texas
A&M Experiment Station and the Texas Tech Boll Weevil Assessment Task Force
(Abemathy et al., 1996) estimated that, due to the boll weevil infestation in the Texas
High Plains, gross farm incomes may be expected to decline by more than $190 million per year and regional business may be expected to decline by more than $500 milhon per year. (These estimates were projected for five to ten years into the fiiture from the time of pubhshing, January 1997.) The task force also suggested that the loss in production is likely to reduce employment by more than 9,000 jobs. BoU weevils attack the cotton bolls while they are growing and destroy the cotton flowers, and in doing this the farmers
lose their crop. It has been difficult to eradicate the boll weevil due to a lack of
uniformity in eradication methods. (This has been rectified in some regions by the
adoption of a unified boll weevil eradication program.) The presence of the boll weevil
problem causes farmers to use higher levels of pesticides, and bugs such as the boll
weevil become more resistant to pesticides. When chemicals such as pesticides or
herbicides are continually sprayed, they interfere with other forms of animal and plant
life or drain into water catchment areas where they cause eutrophication and pollution.
By comparison, with sustainable pork production systems under study at Texas Tech
University, we can make peace with the environment in the Texas High Plains area since
we do not have to be concerned with problems associated with the use of pesticides, herbicides, or fertilizer. (There is very little use of chemicals and fertihzer on a pig farm
compared to a row-crop farm.)
After land has been used for a long period of time to grow the same crops, it tends to lose its fertility. This makes production much more expensive as farmers have to keep using more and more fertilizer. With the problems facing the cotton industry, the time is ripe for altemative enterprises that can profitably utilize the agricultural resources available in West Texas. Given the situation, it appears that pig farming could make an inroad into traditional West Texas cotton fanning. A similar situation occurred in North
Carolina, where indoor hog farming supplanted tobacco, a major cash crop. According to a study by the Swine Odor Task Force at North Carolina State University (Wynne et al., 1995), Ahnost overnight North CaroUna acquired a billion dollar industry that leads the nation in its rate of growth. This new industry was not built around a microchip, and it did not arrive with great fanfare. But it was thoroughly modem, based upon advanced technologies, intensive management, and scientific expertise. And it has more impact on the state's economy than any other new industry in recent times (p.3).
This is in reference to the indoor pig farming industry in North Carolina. If outdoor hog
fanning is an economically feasible enterprise in West Texas, a gradual shift in acreage out of cotton farming and into pig farming could occur over time.
If outdoor pig farming were economically feasible in the West Texas region, it would greatly benefit this region economically. This kind of operation has a number of potential benefits in developing the regional economy. Swine farming is more labor intensive than cotton farming and it would require people to work on the farms. In additon, if the swine industry were to grow in West Texas, packing and processing plants would likely be established and create additional jobs for local workers. Jobs would be created in retail stores, banks, government, etc., due to the multiplier effects of swine production. The results from this research will have potential benefits for agricultural producers, processing industries, and the overall regional economy. Outdoor pig farming provides an altemative enterprise for fanners that could offer increased profitability over dry land cotton farming. Moreover, outdoor pig farming can be an environmentally fiiendly, value-added enterprise that could create jobs and increase income for mral communities in the Texas High Plains. Specific Problem Statement
The cotton industiy in West Texas is well stmctured with a well-organized
production input sector, giiming sector, cottonseed oil milling, shipping and warehousing
sectors. The cotton industry includmg alhed industries is the backbone of the West
Texas economy. Cotton farming is faced with problems in rising production costs
(through use of expensive fertihzers), competition from foreign grown cotton, boll weevil
infestation, and a rapidly dimmishing source of irrigation water. The West Texas region
appears favorable for hog fanning since it has vast flat lands with few or no rivers, thus
ensuring minimal non-point pollution problems (from manure and urine runoff). The
area is sparsely populated which ensures that odor problems from swine manure will be
minimum. Although pig fanning in the West Texas region appears to offer a profitable
altemative to cotton farming, there are a number of potential disadvantages. Grain is
very expensive here because West Texas is a deficit region (because of the large demand
by cattle feedlots) and grain must be shipped in (thus incurring fransportation costs above
the shipping region's price). Weaned pig farming, which is looked at in this study, will
be an excellent altemative for West Texas since it does not require large amoimts of
grain. Weaned pig farming requires less grain (than feeder pig or farrow-to-finish farms)
since weaned pigs are sold off at an early age (15-21 days). Another disadvantage of pig
fanning is that when sows are bred in West Texas, since there are no markets for them, they would have to be shipped to outside markets (e.g., the Midwest or California) for fiirther fattening or slaughter. Plans by Seaboard, Inc. to build a new pork packing plant between Dumas and Amarillo will certainly atfract finishing operations to the region, which will provide local demand for weaned pigs. It has to be noted though that for hog production to develop and grow in the West Texas region, the enterprise has to be economically viable. Hog fanning on the Texas High Plains has to be able to compete economically with hog farming in the Midwest and at the same time be able to be more lucrative than cotton farming in this region. That is, producers will have to be able to produce their pigs at an equal, or lower, cost than indoor farmers do in the Midwest and make a higher retum on investment than cotton fanners for outdoor pig fanning to become established in the region.
There is currently a lack of information and understanding of the economics of pig farming in West Texas and to what extent pig farming could replace cotton fanning.
In addition, no information is available on the regional economic benefits of pig farming to the West Texas region. This information will be beneficial to agricultural producers in West Texas who are searching for enterprises to increase farm income and to diversify their income base and lessen the uncertainty (variability) of yearly row-crop farm income. The study results also should be valuable to researchers, technocrats, and policy makers as they diligently try to find ways to fiirther develop the West Texas economy.
Objectives
The general objective of this research project was to determine the economic feasibility of outdoor weaned pig farms in West Texas and their impact on the regional economy of West Texas. The specific obj ectives of this study are to:
1. Specify model outdoor weaned pig farms for West Texas of varying sizes and
estimate the cost stmcture of each model farm;
10 2. Determine the economic feasibility of the model farms by;
a. Estimating the returns on the model outdoor weaned pig farms;
b. Comparing costs and returns to those of indoor pig farms in the Midwest;
c. Comparing returns from the model pig farais to those from cotton
fanning;
d. Comparing returns from the model farms to financial returns from stocks
and bonds;
3. Evaluate the impact of an outdoor weaned pig farm on output sales revenue for
the regional economy of West Texas.
11 CHAPTER n
LITERATURE REVIEW
The Uterature related to this study is organized into six major categories. The
first section reviews literature on the economic-engineering method of cost estimation.
The second section mainly deals with feasibility studies in agricultural production. The
third section examines literature on the outdoor method of pig rearing. The forth section
reviews studies that estimate returns to agricultural assets. The fifth section looks at the
stmctural changes in the hog industry. The fmal section reviews literature on economic
impact analysis.
Economic-Engineering Method of Cost Estimation
French (1977) looks at the economic engineering method of cost estimation as an
altemative to descriptive and statistical analysis of plant accounting data. The author
examines the economic-engineering approach as an appropriate method to synthesize cost
functions from engineering, biological, or other detailed specifications of input-output
relationships. The author also refers to the economic-engineering approach as the
building blocks approach, the engineering approach, or the synthetic approach. The
economic-engineering technique has thus evolved as "standard good practice" followed to achieve particular study objectives in economic feasibility studies. The focus here is on studies that combine processes or stage analyses into fiinctional estimates which may
12 reveal the nature of short run cost flinctions, the comparative cost of altemative
production methods under a range of conditions, and economies of scale.
The economic-engineering method is more clearly described by a series of four
steps. First is system description. The economic-engineering method requires much
greater knowledge of technical aspects of production than does the typical analysis that
relies on accounting techniques. Typically, the researcher is expected to become famihar
with all the working of the plant usually using flow charts and detailed job descriptions
developed to aid in visualizing the system stmcture.
Second, is the specification of altemative production techniques. Unless the
researcher is only interested in developing short-run cost fimctions for a single plant, the researcher should consider the variations in production techniques that might be
employed at each stage of production. This makes the economic-engineering method of production purposeful and not random.
Third, is the estimation of the production cost function. The total plant production function is obtained by combining the production functions for the various
operating stages or components. Finally, is the synthesis of cost functions. Once the production functions have been specified, the cost functions are determined by applying
factor prices. Short-run cost functions are obtained by specification of a set of production techniques and their capacities (thus defining a particular plant) and computing variable operating costs for a range of output rates, up to or in excess of the design capacity limits.
Long-mn cost functions are obtained by varying plant size.
13 French (1977) examined a four-phase process to undertake a feasibility study using the economic-engineering method of cost analysis. The study outiines the four phases as follows.
1. Analysis of final product demand—This phase brings together all available
information on consumption and utihzation frends, competition and production in
other areas, commodity price levels and price elasticities, income elasticities, and
requirements for product marketing. This is then fransformed into a set of
anticipated prices at delivery time.
2. Analysis of processing, assembly, and distribution costs—This phase requires
estimating processing and assembly costs (long-run cost functions).
3. Analysis of raw product acquisition cost and farm costs and retums—This phase
estimates the probable acquisition cost to the processing plant. If the commodity
is already produced in that area, then existing prices and opportunity costs for
altemative crops may establish the minimum level of prices that must be paid. If
production of the commodity has not been done before, then production costs
must be synthesized.
4. A final budgeting model, which evaluates expected benefits (or losses) from the
venture considered—This stage involves combining the first three stages to
estimate expected retums of processing and production for the several situations
and volume levels considered. A complete study might also mclude a complete
evaluation of expected environmental and community effects.
14 The economic engineering method has been used in firm optimizing studies,
feasibility studies, studies of efficient organization of market regions or industries, and
studies of wholesale market organization. Some examples of the application of the
studies are provided in the next section.
Feasibility Studies
Lazams et al. (1996) conducted a study of swine production networks in
Minnesota. Networking, or producer cooperation, is a popular concept in the swine
industry today. It is viewed as an approach that can help small and medium sized
operations gain increased access to information, technology, capital, and markets. It has
been suggested that networking will allow traditional producers to gain advantages
associated with larger, highly speciahzed, pork production systems and organizations.
The author states that networking is, "a means to gain access to a set of advantages which
a producer or input supplier by themselves could not acquire" (p.l).
The study presents financial analysis of a 1,400-sow farm in Minnesota. With
typical costs, the network farm breaks even with a market hog price of about $44/cwt
from farrow to finish. The research by Lazams et al. (1996) was financed by the
Minnesota Pork Producers Association to determine the extent to which Minnesota pork producers are becoming involved in network arrangements, and to develop models of successful networking strategies. The study also addresses questions of what type of networking arrangements are possible, how to evaluate the benefits and costs of
15 becoming involved in a network, and what the logical steps to organize or join a network are once the decision has been made that the benefits outweigh the costs.
Descriptions and analysis of swine production networks in this report are based on interviews of Mirmesota producers who have joined networks that are far enough along to be producing and selling hogs. The personal interview approach was favored over telephone or mail interviews to enable the research to get a more in-depth understanding of the topic. Interviewed producers included small-scale, informal farmer-to-farmer formula pricing arrangements to large-scale, jointly owned weaned units directed by hired consultants. All arrangements sought were far enough along to be operating and producing pigs. Networks producing market animals were favored over those producing breeding gilts only because market animal production networks represent a more fundamental change in the industry and involve more management issues. Producers involved in this study cited their main reason for being in a network as looking for a way to access the technology and systems they saw necessary to achieve low cost production of the product quality and volume to be competitive in the future.
To present financial analysis data on a 1,400-sow farm facihty, ownership costs were calculated based on straight-line depreciation of the facilities. An 8 percent annual opportunity cost interest rate is charged on the average investment in facilities, breeding stock and operating inputs. Facilities were assumed to have a 15-year life with no salvage value. Insurance at 0.65% and property taxes at 0.6%) are both charged on the original constmction cost of the facilities and equipment. Current constmction costs reported by the surveyed producers for a typical new 1,400-sow segregated-early-wean
16 farrowing unit includes facilities, equipment, and land, with a value of approximately
$1.3 million dollars, or $910/sow space. Nursery and grow-finish spaces are based on
miming the 27,791 weaned pigs through the nursery in 8 weeks and through the finisher
in 16 weeks. Four 1,200-pig nurseries and eight 1,200 pig-finishing buildings are used
for this study. At an estimated $120/pig space for the nurseries and $165/space for
finishers, the nursery will cost just under $0.6 million and a littie over $1.6 million for the
finishers. Land is also included at a cost of $10,000 dollars for finishers for the whole
operation. This study did not look at the cost of land for spreading manure.
The study also looks at operating input requirements based mainly on a 1,200-sow
weaned pig budget in DiePietre et al. (1994) and scaled up to a larger 1,400-sow size. To
determine profitability the study estimates rate of retum based on initial investment,
internal rate of retum, and rate of retum on average investment. The study realized
retums based on initial investment on the total per market hog sold (farrow-finish) of
4.45%) and internal rate of retum of 6.42%), and a retum based on average investinent of
8.01%.
DiePefre et al. (1996) conducted a study of the Missouri system of swine
production. The study prepared a manual that includes a 1,200-sow farrow-to-finish unit.
The study also developed a 1,200-weaner pig model. The study notes that for pig farms to be economically viable, potential swine production facility sites must be thoroughly
and accurately evaluated to ensure that adequate land area is available to spread the waste produced by the animals in a manner that is envirorunentally acceptable. Another consideration is that a water supply of sufficient quantity and quality can be developed to
17 serve the production needs of the facihty. The authors in doing a feasibihty analysis took
into consideration: isolation, accessibility, water handing system, and bio-security.
Cline et al. (1999) in a study tifled "Positioning Your Pork Operation For the 21''
Century" had as a main objective to help producers cope with change in the pork
indusfry. According to the authors, "it is a comprehensive book" and it is a coordinated
effort to bring information on changes occurring in nutrition, genetics, reproduction, health, buildings, equipment, marketing, and finance. The book not only attempts to provide information about this broad range of topics, but also exammes the economic retums for implementation.
The sttidy notes that there was a trend towards larger, more specialized hog production and pork processing operations for the last 60 years or more, with 70%) of the small farms leaving the industry in the last 15 years. The main driver of change is the fact that farms participating in the Iowa State University Swine Business Records program achieved in excess of a 25%o annual average rate of retum on capital in hogs since 1980. The high rate of retum has atfracted outside investors into hog production.
Cline et al. (1999) presented systems of hog production, which are models or simulations of "real world" situations. More specifically, the economic analysis in this text is concemed with the effects of size and technology on cost of swine production.
Two broad categories of budgets are presented in this book—enterprises and technologies. The enterprise systems are designed to capture the differences in cost of production that may result from size differences. The study develops 1,200-sow, 600- sow, 300-sow, and 150-sow farrow-to-finish enterprises. Two systems are developed for
18 the 150-sow unit, high and low technology. The authors also include chapters tiiat are designed to assist smaller producers considering the adoption of various technologies commonly employed by larger enterprises. The technology systems are designed to show how smaller producers can implement the technology and how implementation might impact cost of production. Technologies examined include: split-sex and phase feeding,
artificial insemination and enhanced genetics, all-in/all-out production, segregated early weaning, marketing, and financial management.
The budgets for each system in this study were constmcted using an engineering budget method. The systems are not based on a specific scenario; they are intended to provide a benchmark for comparison and to demonsttate the methodology for making cost comparisons.
DiPietre (1994), in a study on considering costs and benefits of SEW (Segregated
Early Weaning), gave the original motive of SEW as being to ehminate certain diseases in breeding stock without costly depopulation of the sow herd. SEW, in a commercial setting, is sometimes considered a sfrategy to reduce the economic impacts of diseases but not necessarily eliminate them. SEW also helps increase efficiency in pig flow. This practice helps develop a sale lot of single source, quality feeder pigs from multiple farrowing farms with different health statuses. It reduces production risks in highly leveraged startups or expansions. The success of any proposed change will depend on its abihty to boost profits. Producers must assess both the technical and financial feasibility of the change and then project their expected profits as a result of the change. The
19 feasibility results should be tested first, and if it is not feasible, then it should be
disquahfied.
Technical feasibihty for implementing SEW includes several areas related to site
selection. They include water (quality and quantity) and utility availability, permitting,
feasibihty of nutrients management from the site, and other site-related issues like bio-
security, distance from breeding-farrowing, odor, etc. If a suitable site for the technical
feasibihty cannot be found on the site that the farm is to be set up at, then the project
should be abandoned.
Once technical feasibility has been estabhshed, fmancial feasibility follows. The
debt-carrying capacity of the farm determines the financial feasibility. If the SEW
project is termed as being profitable, but the farm has insufficient debt-carrying reserve to
obtain the necessary capital, the project has to be judged as financially infeasible. Level
and structure of existing and anticipated debt load of the farm must be considered for
financial feasibility. If the farm has aheady used all of its capital debt repayment
capacity, then all expenses must come out of the cash flow. Otherwise, the SEW project
is said to be financially infeasible until debt reduction or restmcturing is accomplished.
After feasibility is established, then profitability analysis is undertaken. There are
a number of ways to assess the expected profitability of a change to SEW. The two most popular methods are simulation modeling and partial budget analysis. Simulation models
are usually elaborate spreadsheet models to compare the baseline performance of the
farm to its performance after a change. Partial budgeting is an accotmting procedure, which lists all of the expected changes, both positive and negative. Each change is
20 assigned a dollar value equal to its annual cost or rettim. From this information, an
expected change in profits is calculated. These two techniques require accurate
information from tiie farm's own record system and from outside sources (such as
building and remodeling costs and land acquisition costs). A careful and conservative
estimate of the biological improvements must be made along with their expected value.
According to the author, a veterinary consuhant who speciahzes in swine is required to
make these estimates.
The partial budgetuig technique is the simplest method to check for feasibility of
SEW (DiPietre, 1994). Partial budgeting is an economic tool that helps organize
information when minor to moderate adjustments are made to a whole-farm plan. Then
the cunent situation is compared with an expected outcome due to a change. To
constmct a partial budget, first define the proposed change. Then collect information
from the farm's OWTI record system and other sources regarding everything that will be
affected by the anticipated changes. Next, classify each change in four categories as
follows. On the positive side, the change will either be an increased retum or a decreased
cost. And, on the negative side, the change will either be an increased cost or a decrease
in revenues. The partial budgeting method assesses changes in annual profitability.
These changes are expected to remain constant until they are incorporated into the farm plan. According to the study, fixed costs of buildings and improvements can be remembered as DIRTI5. This stands for depreciation, interest, repafrs, taxes, and insurance. It is advisable to accurately calculate these individually. However, as a mle
21 of thumb, 15-18%) of new cost can be used for depreciation, interest, repairs, taxes, and insurance.
Cross et al. (1999) in a study on the economic analysis of a 600-sow contract
SEW feeder pig production unit analyzed the economic feasibility of indoor feeder pig fanners in Tennessee. The study assumed above-average levels of management abilities using modem buildings and equipment. All pig facihties used pit recharge or flush systems for handling animal wastes. Building and equipment expenses were also based on new constmction costs. Annual depreciation and interest expenses were calculated assuming that buildings were halfway through their 20-year usefiil fives.
The budgets formulated by the study estimate economic costs and retums, and include interest expenses for all resources used in the hog enterprise. The interest expense reflects the fact that capital invested in hog production is costly. Borrowed capital entailed a cash interest charge for repayment to lenders. Capital provided for by the ovmer results in a non-cash opportunity cost, due to the fact that the capital could have been invested elsewhere and eamed the owner interest. The study considered the foregone interest as a cost to the owner, but not a cash expense. Labor expense was also included in the budgets to reflect the cost of hired and/or family labor.
The enterprise budget for this study shows that an average of 9 pigs are weaned per fitter, and sows farrow an average of 2.4 times per year. A group of sows farrow every 7 days. Pigs are weaned at an average of 17 days (14 days to 21 days). AU production is assumed to take place on a single site. The study used a market price of
$28.00 per pig at the farm in the base analysis. The annual replacement rate for sows on
22 this research project is 35% (208 sows). Sale of cull animals contributed $23,040 per
year to the feeder pig enterprise. Deductions from revenue included pork checkoff
expenses of 0.45%) of total hog sales to the National Pork Producers Council's pork
checkoff program. Total revenue for the 600-sow unit is $384,183, which is about $640
per sow at the assumed level of production. The estunated retum to land, management,
and risk is $1.18 per pig sold or $25.59 per sow. The study does not include feed for
pigs. Sow rations include both gestation and lactation diets.
The study does a sensitivity analysis to analyze the effects of changes in pigs sold
per litter, pig price, feed price, and pig price on retiun to land, management and risk. The
study found that positive retums occur when the pig price is $30/head and above for most
litter sizes examined. By confrast, when pig price is $26/head or less, retums are
negative for ahnost all feed prices examined. The enterprise was generally profitable
when pigs sold per sow remained above 19.4.
Outdoor Hog Production
Wegehenkel (1994) conducted a study on the Moorman's Outdoor Swine
Technology (MOST), a system that has the goal of providing producers with a relatively
low-investment, high-intensity altemative to confinement operations. This program provides systems, products, and programs to compete effectively in the business of producing pork. The study's main objective was to incorporate new technology to
overcome the traditional disadvantages of outdoor swine production units.
23 The author contends that a major factor in favor of outdoor systems is the high
cost of buildings and equipment for intensive confinement systems. Costs of $2,500-
$3,000 per sow are not uncommon for confinement, while outdoor systems can have
costs in die range of $650-$750 per sow. Labor requirements outdoors are expected to be
higher than in confinement. However, the British radial design breeding herd unit, which
was used in this study, significantly reduced the amount of labor required. Wegehenkel
(1994) also noted that other fradeoffs in an outdoor system compared to confinement can
be slightly less productive. Feed consumption can be slightly higher. Other costs, such
as beddmg, feed, and transportation, may be slightly higher. Lower charges for
buildings, energy, repairs and associated costs should more than compensate for these
added expenditures. The overall economic result is that slightly lower net margins,
coupled with significantly lower capital costs, work out to a better retum on capital.
Wegehenkel (1994) also looked at operating costs budgets for breeding herds and
herds selling feeder pigs that were adopted from a study done at Cambridge University in
England. The study recommended that land should be well drained, and ground cover
should be present and in good condition prior to stocking. A gestation rate in the
gestation-farrowing subunit of 6-7 sows per acre was about right to maintain ground
cover. Protection of pigs from temperature extremes was important. Shade ui hot weather and insulated shelters and adequate bedding in cold weather were desirable.
Insulated fanowing huts were also very desirable in hot weather. In moderate climates, pigs may be weaned into outdoor nursery environments. In more severe weather, some
sort of protected nursery facihty may be desirable.
24 Wegehenkel (1994) recommended a maximum stocking rate of 50-60 pigs per acre in grow-to-fmish units, where successive groups of pigs can be rotated to new lots and ground cover can be maintained in better condition. A local grass variety was recommended for ground cover (Wegehenkel, 1994). Fescue was aheady present on the site of this study. Hand feeding was prefened during gestation and a concrete slab is the preferred feeding area. A complete pelleted or ground diet can thus be fed to the sows.
Waterers can also be placed on this slab to reduce formation of mud holes.
To have pigs old enough and large enough to withstand the rigors of outdoor production, weaning generally should not be done before 3 or 4 weeks of age. In severe weather, an indoor nursery might be necessary, especially for smaller pigs. The study notes that heat has proven to be a bigger problem than cold m the breeding herd unit.
Shades and mister nozzles that are controlled by a temperature/humidity controller provide valuable cooling. Where misters are used, gravel should be used to prevent the formation of mud holes.
The Leopold Center (1996) conducted a study that looked at swine systems options for Iowa, including outdoor production as an altemative to large-scale hog confinement. Outdoor farrowing now accounts for 5 to 10 percent of Iowa's hog production, although in some areas—^Dubuque, Delaware, and Washington counties in
Iowa; Henry County, Illinois; and Cass County, Michigan—it is still widely practiced.
Modem outdoor rearing offers advantages that make it a competitive altemative to confinement. These systems requfre simple, portable housing, watering systems, and feeders. Pigs and huts are moved with a fractor, loader, hydrauhc cart, or all terram
25 vehicles. Low cost, portable electric fences work well in confroUing pigs. Pasture farrowers typically stock 7 to 15 sows and litters per acre, and labor demand per litter is low.
The Leopold Center sttidy (1996) noted that two traditional systems are widely used: the one-liter or all gih system and the two-litter system. In the one-htter system, gilts are fanowed once, usually in summer, and sold. Their gih pigs are raised and bred to farrow one year later. In the two-litter system, sows farrow in spring and fall, generating two litters per year but avoiding summer and winter climate extremes. (A few irmovative producers sfretch the pasture-fanowing time frame by using insulated huts to fanow in the winter.)
Feed currently accounts for 60 to 70 percent of the total cost of producing hogs farrow to finish. It is a major variable between low-cost and high-cost producers. Lower fixed production costs of outdoor operations more than compensate for reduced litter size and poorer feed efficiency. Analysis of Iowa State University Swine Enterprise records from 1989 to 1993 showed that outdoor farrowing herds required 20.6 pounds more feed per hundred weight of live gain (or 51.5 pounds more feed per 250-pound pig marketed)
(Leopold Center, 1996). Grazing of outdoor pigs can also conserve soil and help protect water quality. Although not widely practiced due to the fact that pigs are non-ruminant
(monogastric) animals, the Leopold Center study advocates grazing alfalfa since pigs' energy needs are low relative to their intake and their digestive tracts can utilize fibrous feeds.
26 The Leopold Center sttidy (1996) reports that feed costs and fixed costs (which
depend on die housing system used) are the two main factors determining swine
operation profitability ui Iowa. One survey found that fanow-to-finish outdoor fanowing
producers enrolled in tiie Iowa State University Swine Enterprise records program from
1983-1989 weaned fewer pigs per litter, weaned fewer pigs per sow per year, and had
poorer whole herd feed efficiency than indoor confinement producers (Leopold Center,
1996). However, the outdoor operations had lower fixed costs and overall had lower cost
of production (a lower break-even price). These lower costs dramatically overshadowed
the reduced litter size and poorer feed efficiency. Fixed costs were $3.33 less per pig
weaned for outdoor herds than for indoor. The total production cost to produce a market pig was $1.95/cwt, or $4.88 per 250-pound pig, less for the outdoor herds. Production
costs reflect feed, labor, repairs, utilities, health, and fixed costs. Overall, fixed costs were estimated to be 30 to 40 percent lower for pasture systems than confinement
systems. Total costs were about 5 to 10 percent lower on pasture than confinement. The number of weaned pigs per litter was 5 to 10 percent lower on pasture, but sow mortality was usually lower in outdoor operations.
Honeyman and Peimer (1995) conducted a study of outdoor vs. indoor pig production in Iowa. They cite a study by the Iowa State University Swine Enterprise records from 1983-1989 that states that farrow to finish producers using outdoor fanowing weaned fewer pigs per litter, weaned fewer pigs per sow per year, and had poorer whole herd feed efficiency. However the outdoor operations had lower fixed costs and overall had a lower cost of production or a lower break-even price. The lower cost
27 for outdoor production is dramatic and noteworthy in spite of fewer pigs per litter and per
sow, and poorer feed efficiency. Year to year variability was greater for outdoor than indoor herds.
Honeyman and Pernier (1995) noted that outdoor pig production is a viable cost competitive approach to raising pigs indoor in Iowa. Outdoor producers should focus on keeping fixed costs low, which is the primary advantage of outdoor pig production, and on improving the weaker areas of production includmg pigs weaned per litter and feed efficiency. Pigs weaned/sow/year may be impossible or impractical to improve because of the seasonality of outdoor production. Pigs weaned per fitter for outdoor production systems have been reported to increase by intensifying management, tight control of the breeding season, improved larger huts, and ample use of bedding. Aggressive parasite confrol, phase feeding, split sex feeding, or feeder adjustments may achieve improved feed efficiency in outdoor systems. Improved genetics may also improve both titter size and feed efficiency. Sows with superior mothering ability would be very beneficial in outdoor farrowing systems.
The differences of raising pigs indoors versus outdoors are obvious. Outdoor production units use simple portable stmctures to shelter pigs. The pigs are spread out over several acres. Indoor pigs are raised in confinement buildings. The economic difference between outdoor and indoor swine production systems is less apparent. The author notes that the success of outdoor pig farmuig ui Great Britain has demonstrated that outdoor production is very competitive with indoor production when intensive
28 management of the outdoor system is coupled with well-drained soils, improved
technologies, and a mild climate.
The study analyzed annual averages from the Iowa State University Swine
Business Records program from 1989 to 1993 to compare indoor versus outdoor
productions, hidividual records of the producers had been previously summarized by
category. Only annual averages for each production category, both outdoor and indoor,
were available. The study analyzed these annual averages to determine an overall least
square mean (1989 to 1993), standard deviation, and a pooled standard enor of the mean
with P-value to determine statistical difference. A major deficiency of the data was the
very small number of outdoor herds (5 to 12) as compared to indoor herds (181 to 231).
The outdoor herds weaned 0.74 fewer pigs per litter (P<0.007) than the uidoor herds.
The weaning of outdoor herds was also more variable as shown by a larger standard
deviation in pigs per litter. Fixed costs for the outdoor herds was $3.33 less per pig
weaned than for the indoor herds (P<0.0001). Total production cost or breakeven price to produce a market pig was $1.95/cwt., or $4.88/pig (250 lbs), less for the outdoor herd
than for the indoor herds (P<0.06). Production costs variability as shown by standard
deviation was larger for the outdoor herds, although this could be an artifact of the small number of outdoor herds in the sample.
Outdoor herds had lower break-even cost of almost $5 per pig marketed. This difference in cost was considerable and could have major unplications for competitiveness and reduced risk of the outdoor system. Outdoor herds required 20.6 lbs.
29 more feed per hundred weight of live gain, or 51.50 lbs. more feed per 250 lb. pig
marketed than the indoor herds (P<0.006).
SEW (Segregated Early Weaning) Pigs
Separating pigs at an early age from both the breeding herd and grow-fmish pigs
has revolutionized the swine industry (Hill, 1994). Segregated early weaning (SEW) is
an age separation practice that provides healthier, more efficient pigs. It unleashes the
genetic potential for growth and lean deposition of our improved breeding stock. Hill
notes that SEW has evolved over the past 15 years. It is an all-encompassing term
defining production systems that minimize infectious diseases by age separation. Early
weaned pigs from 10-21 days are separated from the breeding herd and from grow-finish
pigs. Recognizing the biological value of age separation is the reason for the revolution.
There are many variations/modifications to the SEW method, but they all depend on one
fact: when an infectious disease spreads through the breeding herd, a stabilizing process
occurs. This stabilizing process is mediated by the immune system of the animals. Once
stabilization occurs, little or no fransmission takes place to offspring during the first 2-3
weeks of life.
According to Clark et al. (1999), SEW refines the technology developed by MEW
(medicated early weaning). Two differences between SEW and MEW are medication
and isolation distance. However, if certain diseases are present in the herd, a regime of medication may be required to help eliminate those diseases (Cline, 1999). Requirements
for the reduction of the quantity of medication given to the sows and piglets has been
30 implemented under SEW. hi addition, the distance required to be kept between the
breeding and early weaning herd has also been reduced. Past research required that in
heavily concentrated production areas, the nursery had to be several miles from the
breedmg and farrowuig units. This was not practical and cunent work indicates that
several hundred feet might be sufficient separation to ensure bio-security for the eariy-
weaned piglets. Distance requirements have been reduced due to the fact that pigs will
only be in the growing units for a short period of time. Risk of disease transmission may
be higher using this, "multi-site-on-same-site method"; however, the limited separation
seems to be satisfactory for insuring bio-security.
Another requirement of SEW is that sows be naturally farrowed at their source
farm. Piglets should be weaned between 5 and 21 days of age (Clark, 1994). At
weaning, the piglets are placed in a nursery that is biologically secure (within the
limitations of the farm) from the breeding herd. The nursery used for SEW must be
cleaned and disinfected between each group of animals. Also, all-in/all-out production
techniques must be rigorously followed.
An important feature of SEW is that SEW is designed to be used as a tool in
commercial production. Due to costs involved in earlier systems, early weaning
generally was only used to produce breeding stock (other stages of production were not treated to save on costs), and therefore, within a relatively short period after repopulation, disease would become re-established in the new herd. Segregated early weaning not only breaks the chain of disease transmission, but is very effective at preventing the chain from reforming.
31 The sttidy by Clark (1994) refers to a research sttidy done at Purdue Uni\'ersity on
SEW, which shows that a set of benefits, aside from disease elimmation, exist. Eariy
trials at Purdue University give a strong mdication that SEW enhances productivity, for
example, reducing days to market and mortality, and improvmg feed efficiency.
The SEW weaning system is without doubt a proven production method that
provides healthier, more efficient pigs. The challenge for pork producers is to develop a
system fhat is economically feasible so they can take advantage of the technology. The
study notes that smaller producers will not have some of the advantages that larger producers will receive from the system. For example, it will not be practical for someone with 200-300 sows to have three isolated sites.
Retums on Agricultural Assets
Dodson (1994) focused his study on the profitability of individual farm businesses that are farm proprietorships, partnerships, corporations, and cooperatives but it excluded landlords and corporations. The study used farm level data from the U.S. Department of
Agriculture's Farm Costs and Retums Survey, 1987-91. In measuring profitability, the study did not measure the well being of the household since households may receive additional income from other sources. The study looks only at specialized farms since 40 percent of U.S commercial farm production is from farms that receive 95 percent of their total production revenues from only two enterprises. In the study, Dodson disaggregated data into 14 production specialties, which were further disaggregated: first by national region and then by annual farm sales. This gave 67 unique armual sales class divisions.
32 Li each of these classifications the categories of region and farm size vary considerably
and farm retums are also in the same categories as the farm size.
The study notes that farm size played a role in the farm's retum. The study
measured farm business profitability using net farm income, net cash income, percentage
of farms with negative net farm income, and retums to assets. This study used different
categories for different regions, thus making it difficult to compare region-to-region or
crop-to-crop. The study calculates profitability of farms as measured by average retum
on assets (ROA) with and without capital gains for the years 1987 to 1991 for different
crops and livestock. For cotton, the study calculates an average ROA for the U.S. and for
regions by size of operation. For example, the U.S. is divided into regions, and then
farms are classified into categories by revenue levels, over $250,000, $100,000 to
250,000 and $100,000 and under. The 5-year average ROA for cotton was found to be
6.7 percent for the entire U.S and 3.3 percent for the West region. ROA for hogs is
calculated for the U.S. and for two regions by revenue category: North Central with
revenues over $100,000 and $100,000 and under, and Southeast with retums over
$100,000, and $100,000 and under. Dodson found the 5-year average ROA on hogs to be
4.4 percent. Compared to other retums, hogs generally did very well. In livestock, hog
retums were second to poultry, and when compared to crops, only vegetables did better than hogs in retum on assets.
McEfroy and Dodson (1994) focused on specialized commercial hog farms, which made up 68% of total hog production for 1987-1991. They note that approximately 70%o of U.S. hog production origmates in the North Cenfral region. The
33 average commercial hog operation in this sttidy produced around 2000 hogs and operated
400 acres annuafly. Average gross cash incomes rose over the 1987-1991 period. Hog
prices were near or above $50.00 per hundredweight in 1990-91, resulting in 6-8% higher
livestock sales than ui the three previous years. Thus 1990-91 net cash incomes of
commercial hog producers recovered to the $40,000 - $50,000 range after two years of
net cash incomes around $30,000. The authors noted that the 6% variance in cash
incomes imphed relative stability from 1987-91. Cash expenses rose 15%o between 1987
and 1989; during the same period feed expense is the largest expense component
averaging 38% of the total. In 1991, 25%o of commercial hog farms had aimual sales of
greater than $250,000, and only 8% were in the largest size class of $500,000 or over.
Balance sheets for commercial hog operations follow national trends for general
agriculture with the ratio of equity to assets increasing. Total assets increased 13%) from
1987-91. Debt levels also fell. Financial ratios, like debt to asset ratios, while higher than the U.S. average for all farms fell each year between 1987-90 and then rose .50 points in 1991. When compared to other farm types, commercial hog farms carried more relative debt as indicated by the debt to asset ratio. Profitability as measured using retum on assets for all commercial hog farms in 1987-1990, except for 1989, exceeded the average for all livestock farms. Retums over the five-year period exceed retums on all hvestock retums except for poultry. Efficiency as measured using the gross ratio
(achieved by dividing cash operating expenses by gross cash farm income) showed that over the years 1987-91 hog farms operated more efficienfly than commercial beef or sheep farms.
34 StiTictural Changes in the Pig Industry
In a sttidy of changes that the hog industry has gone through, Rhodes (1995) looked at the transition the hog industry has gone through the last 75 years. The number of farms with hogs declined from 3,768,000 in 1940 to 604,000 in 1969 (United States
Department of Commerce, Bureau of Census). The current industrialization began in the
1970's with rapid transition of hog production mto partial or total confinement.
Production units in the 200 to 499 head of annual sales began declining in the 1970's with those in the 500 to 999 group fust declming in the 1980s, hi 1978, the Census showed one-third of the output produced by units marketing 1,000 head or more per year, but only 7 percent by those large units marketing 5,000 head or more. Nine years later, the 5,000-head group marketed 58 percent. That percentage rose to 69 percent m the
1992 Census of Agriculture.
In a 1975 survey by Rhodes (1995), few producers marketed more than 50,000 head annually and they were ignored as an anomaly, hi their 1989 survey they tried to identify all of the largest producers, countmg 33 producers marketing 50,000 head or more in 1988 with a total output of 5.7 milhon market hogs, or 6.5 percent of national
slaughter (Rhodes, 1990). Further surveys showed 41 producers in the 50,000 group
marketing 8.1 milhon hogs m 1991 and 57 producers marketing 12.33 million hogs in
1993, or 13 percent of national slaughter (Rhodes and Grimes, 1992). These numbers
documem what industry leaders recognize as an amazingly swift evolution taking place in
hog production. Seven of those 57 frnns each marketed more than 500,000 hogs and
35 averaged 792,000 head for 1993. The total marketing for these finns m 1993 was 24.6 percent greater than in 1992.
The sttidy estimated that there were about 1,000 contractors in 1986 ranging in size from annual sales of about 1,000 head to more than 500,000. Contractor marketing is estimated to have grown from 9.5 milhon head of market hogs in 1988 to 13.2 milhon in 1991 and an estimated 14 to 16 milhon in 1993. Very large contractor marketing
(50,000 up) has grown more swiftly from 4.1 milhon in 1988 to 11.0 milhon in 1993.
Small contractor marketing has grovyn from 5.4 milhon head in 1988 to 6.8 milhon in
1991. The smaller contractors were not mcluded in the survey that the author undertook in 1993.
According to the 1992 Census of Agriculture, total hog/pig marketing by units marketing 5,000 head or more was 82 percent of the total in North Carolina and 73 percent in Arkansas compared to 21 percent in Illinois and 14 percent in Iowa.
Approximately one-third of the super-producers (50,000 head plus) are located—or headquartered—in North Carolina. Rhodes (1995) noted that these very large operations are attracted to thinly populated areas with cheap land and lower-priced labor, and their grovyth is less likely to continue in the lowa-IUinois-Indiana corridor.
Rhodes (1995) cited a study by Hurt at Purdue University that estimated a cost advantage of nearly $2 per cwt of live hogs for a unit with 3,400 sows compared to a unit of 650 sows. The author also notes that completely comparable costs are not publicly available to distinguish between a declining or flat average cost curve m the long run, but
36 what is clear is that diseconomies of size are not limiting the growth of firms with 95,000
sows.
According to Rhodes (1995), the obvious winners to these stiiicttiral changes are
consumers who benefit from these large gains in production efficiencies and the smaller
gains sometimes available in vertical relationships in terms of lower prices and better
products. Irmovative, large scale, and integrated producers are wiimers. Losers include
those producers who hang on to old ways.
Impact Analysis
Otto and Lawrence (1999) focused their study on the Texas pork industry. The
study notes that total livestock and poultry marketing was $8.4 bilhon in 1999 with cash receipts for hogs accounting for less than one percent of the total but the hog share is increasing. The analysis focuses on the value of hogs produced in Texas as a critical measure that drives expenditure levels for various hog related inputs and investments.
Therefore, the analysis was concemed with the impacts and resources in pork production.
The study notes that froml980 to the tune of the study the number of farms in the U.S with hogs decreased by approximately 83%) from 27,000 to 4,600 farms. Meanwhile the inventory of hogs per farm has increased from 34 to over 189.
For this study to reahze its goal. Otto and Lawrence (1999) developed different budgets for different size systems because hog production is subject to economies of size where unit input use per unit of output declmes as operation size mcreases. Accordingly, peak production in Texas was classified into one of the three-size classes, small (150-
37 sow), medium (300 sows), and large (1,200 sow) size fanow-to-finish production facihties. The operations size was classified using the 1997 Census of Agriculture inventory distribution with updates from the 1999 USD A December Hogs and Pigs
ReEort to more closely reflect changes that have occurred the last three years. The input output (10) model used was based on the IMPLAN system developed by the U.S. Forest
Service. The analysis looked at the overall unportance and contribution of the pork industry to the Texas economy based on the 1999 situation and cunent levels of production in the Texas pork industry. The study notes that the pork industry in Texas is facing a trend towards larger units as evidenced by the acquisition of Murphy's and
Carroll's by Smithfield, which produces approximately 12%) of the hogs in the U.S. The sttidy also looked at the environmental impact of pork production, as it is another emerging issue that is not independent of the economic impact of the industry. The study arrived at a Texas State farrow-to-finish average retum to capital of $80.00 per litter. Total economic effects of the pork industry through the processing level as of 1999 production was: total personal income, $70.74 milhon; value added, $112.08 miUion; and total employment impacts, 2,753.20 milhon.
38 CHAPTER m
CONCEPTUAL FRAMEWORK
The conceptual framework is focused on an analysis of cost estimation, pricing
(and thus rettuns), and resource allocation in outdoor pig farmmg as a new business
enterprise in West Texas. This section will illusfrate the fact that fanners who can
produce at the lowest possible cost at each possible output level will be able to compete
favorably m the market (Binger and Hoffinan, 1998).
Cost Estimation
The concept of average cost is an integral part of economics. An average cost
curve reflects the average cost of producing varying quantities of a product. There are
both short-mn and long-run average cost curves. A short-run average cost curve reflects
average cost for a given size plant with a given investment in plant and equipment. By
comparison, a long-nm average cost curve reflects the tangency points of different short-
run cost curves. The long-mn average cost curve represents the average cost of producing different amounts of the product in different size plants. A long-ran cost
curve for outdoor pig production is shown in Figure 3.1. In general, long-nm cost curves reflect economies of size, with average cost decreasing toward some minimum level as farm size increases.
Hogs are predominantly raised in the Midwest. For the hog industry to establish itself in West Texas, it would have to be able to compete with the Midwest hog industiy.
39 Hog markets, finishing farms, and pork processing plants are mostly located in the
Midwest region. Moreover, prices for hogs and pigs are largely estabhshed in the
Midwest region where a high percentage of hogs are raised and marketed.
Weaned Pig Pricing and Resource Allocation
Pricing efficiency in a purely competitive market situation relates to the degree in which prices, premiums, and discounts conespond to producer costs (Henry, 1968). In a competitive market, the marginal cost of producing a product is equal to its price (Binger and Hoffinan, 1998). This point is the point of equilibrium in a supply and demand framework:
(1)P = MC, where MC is the marginal cost of raising pigs, and P is the price the market offers for weaned pigs of a certain age.
The pig market is seen as being perfectly competitive m terms of buyers and sellers in the market, mobility of resources, and freedom from undue restrictions. The pig market is said to be homogeneous since a weaned pig raised in West Texas can be substituted for another weaned pig from the Midwest with the same qualities. Individual weaned pig producers being too small cannot effectively influence price, and that makes producers price takers with the market forces of demand and supply determining tiie price of weaned pigs. The major markets for pigs are hi the Midwest region where most pigs are raised, and these markets are largely responsible for discovermg the market
40 (equilibrium) price of pigs. Pig prices in markets outside the Midwest are equal to the
Midwest price adjusted for fransportation cost.
Pig producers hi West Texas must compete on a cost basis with producers from
the Midwest. They would have to produce weaned pigs at equal or lower cost than the
market pig price (West Texas cost includes fransportation cost of weaned pigs to the
Midwest) to be able to stay in business and compete with Midwest pig farmers. Pig
fanners m the West Texas region will also have to produce at costs low enough to
cushion themselves from pig price troughs during low price cycles.
In a competitive market system, price levels and thus retums will determine
resource allocation. For pig production to become estabhshed in West Texas, it must
displace some other agricultural enterprise. In West Texas, cotton is the principal row
crop in much of the region, and the land used to produce cotton is suitable for pig
production. Minimal irrigation (3 acre inches per year) is needed on an outdoor pig farm
to maintain ground cover under the pigs' feet compared with 6 acre inches or more for
cotton farming. Approximately half of cotton acreage in West Texas is irrigated and
would be suitable for an outdoor pig farm. The potential for establishing pig farming in
West Texas depends largely on whether the retum from pig farming is competitive with
that of cotton fanning and other agricultural enterprises. An outdoor pig farm in West
Texas would have to contend with sharing resources with other agricultural enterprises,
such as cotton.
Investment capital to establish pig farms could come from a number of sources.
Displaced cotton enterprises, for example, could be the source of investment capital in
41 the form of land and equipment. Other sources of investinent capital include non- agricultural investors. For non-agricultural interests to invest in pig farming they would have to receive retums comparable to those eamed in financial investments such as stocks and bonds. There is also potential for a financial investor to use agricultural investments as a diversification option that reduces risk (variability) on a financial portfolio.
42 Avg. Cost
Average Cost Curve
Number of Pigs sold
Figure 3.1. Average Cost versus Pigs Sold.
43 CHAPTER IV
METHODS AND PROCEDURES
This chapter will discuss the methods and procedures used to accomplish the
objectives. In the first section, a general overview of an outdoor pig farm is provided.
Then a detailed look at the economic engineering approach to cost estimation is
explained. The next section covers weaned pig pricing. Net income calculations and
detailed financial analysis are explained ui the following section. Retums from the
outdoor pig farm will be compared with retums from indoor pig farms in the Midwest,
with cotton farms in the West Texas region, and with financial assets. The last section
looks at the economic impact of a pig farm on the West Texas region.
General Overview of the Farm
The study was based on a research farm located in Idalou, Texas, and mn by the
Texas Tech Pork Industry Institute. A typical 300-sow farm has an irrigation system that
consists of a 120-acre center pivot irrigation system, boom arm for extending irrigation
water to the comers of the farm, and an underground piping system that supplies wallows with water. It also consists of nine radials as shown hi Figure 4.1. Each radial has twelve one-acre paddocks with a hub in the middle. Half of the farm is used for the first year, and then production is rotated to the other half the following year, with 36 of tiie paddocks being used for breeding/gestation and 12 used for fanowmg. Pastures are rotated to allow the grass to recover and re-grow for the next rotation of sows.
44 Nine radials
A radial layout
Layout of a paddock
Figure 4.1: Enlargement of radial showing gestation: Adapted from Rachuonyo (2001) huts (rectangle), andwallow(round).
45 During farrowing, five sows are placed in each fanowing pen for a period of five weeks. Ten sows are placed m each pen during breeding and gestation. Breeding and
farrowing huts are placed in each of these pens as required (Figure 4.2). Fanowing huts
are approximately 6 feet wide, 5.5 feet long, and 40 inches high, while the breeding and
gestation huts are 10 feet wide by 14 feet long. The huts are semicircular (hoop)
stmctures. Farrowing huts have a fender (gate) at the front of the huts to control the piglets as shown in Figure 4.2. Farrowing paddocks contain five huts, and breeding and
gestation paddocks contain one hut. Roadways mn between each radial and a working pen (hub) is placed in the middle of each radial. A wallow is established in each paddock
for cooling of the pigs. Surrounding the radials and connected to the roadways that ran between each radial are roads and a grass strip that checks soil erosion and water run off
Land requirements
Land prices for the West Texas region were based on historical land prices for the Southem High Plains. Land was valued at $600 dollars per acre, which is approximately equal to the average price of irrigated cropland in the Southem High
Plains (Federal Reserve Bank of Dallas). The Idalou farm originally had an old world blue stem sod, which was established under the USDA Conservation Reserve Program.
For this study, pasture establishment costs were calculated based on the experience the
Idalou farm has had with blue stem as a ground cover. Blue Stem was favored smce it only requires minimal irrigation as compared to cotton.
46 * ^5..» > y
'.*. -'^ ^ -^^^ '^ A £'% fS 5 *f
Figure 4.2: General layout of the Idalou farm
47 hi this study, it was assumed that 3 inches of water was applied to the outdoor pig farm to maintain ground cover. Blue Stem was used as the standard pasture for each farm size
with establishment costs from the Texas A&M Experiment Station enterprise budgets.
Improvements for an Outdoor pig farm
A number of land improvements are required for an outdoor pig farm. Table 4.1
shows a description of the land improvements (as well as farm equipment) for the farm.
A perimeter fence was installed for each farm as a demarcation point and a way of
keeping stray pigs in. To effectively control the pigs and keep them in their paddocks, an
electric fence was used, which could be easily moved when the need to rotate arises. In
between each radial and around all radials are roadways that ease movement of pigs in
and out of the paddocks. At the middle of the radials is a hub. The hub is a steel
stmcture welded together with gates to each of the paddocks that facilitate pig movement.
The study assumed a well for each of the farm sizes that irrigated the land and supplied
water to the wallows in each paddock. The well is also used to irrigate the grass using a
center pivot system. To provide enough pressure to ran the wallows, a pressure tank and
a pressure pmnp is used. A storage building is used to store all farm equipment.
48 v^ o o o o o o O O O OO __ r* O O O >n O O-V-JVltOO O
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iri t*- rf OS es \OOOoovo*OTirJCSooin o i-H'^r*-''-'r«iTt'^dosO\rn a o\ r* p^' o m o cs o o ^• r* oo i-< o »n m r* p r<; w^ •e -^ Tt od H MD -'t '(t •* 5 "O ^ »n -^ Tt -It tn T) m m ^ -^ ^esm-^irivot^ooos ONO\OSO\OSO\0\OSON 0\ 0\ ^\ Os Q\ 0\ Os 0\ 0\ « .^0 49 Farm Equipment To effectively nm an outdoor pig farm requires farm machinery and equipment. A pickup track is used to run simple farm enands and transport pigs to the market in the Midwest for the 300-sow, 600-sow, and 1,200-sow farms. A semi-track would have to be hired for transportation for the 5,000-sow farm size. A tractor was used to pull a feed trailer and hydraulic trailer. The feed trailer was used to feed sows by ferrying and dispensing pig feed around the fence perimeter. The hydraulic trailer was used for moving pigs around the farm whenever a movement was necessary. Considering the large fracts of land used for outdoor pig operations, to ease mobility around the farm a mule with frailer is used to move small items and labor. Breeding Stock The Idalou, Texas, outdoor farm has tested different breeds of pigs to determine which does better in the West Texas climatic conditions. The farm is cunently using the Newsham breed acquired from Newsham Hybrid (Colorado Springs, CO). For each farm level an extt-a number of sows (4%o) was included in the budgets since it was assumed that new gilts were brought to the farm about one month early to facilitate inbound transportation in economical size units and to ready the gihs for entering the breeding herd. Boars were provided for artificial insemination and for natural service. 50 The Economic-Engineering Approach of Cost Estimation The economic engineering method was favored because it does not strictly require the use of particular methods, however it recommends certain guidelines that have come to be known as "standard good practices" (French, 1977). There are other methods that can be used to carry out a feasibility analysis but they generally require the use of historical accounting records, which are not available for a new enterprise such as an outdoor pig farm in the West Texas region. The economic engineering method does not require any previous accounting records since it involves a thorough study of every component of the farm and this makes it expensive and time-consuming to implement. Estimation of a production function with the economic engineering method requires a wealth of technical know how about each and every component of the farm. With the economic-engineering approach of estimation of farm cost, for each production level, a set of four "standard good practices" was followed as explained below (French, 1977). First, a thorough description of the farm process was developed through a set of budgets for each production level. Second, ahemative production techniques were specified for the pig farm. This was done with the help of graduate students at the Department of Aiumal and Food Sciences at Texas Tech University who provided information on the latest research and altemative techniques in the pig industiy. Third, was tiie estunation of the production fimction for the farm. At this stage the study combined all the production stages of an outdoor farm to get a clear idea how the fann will operate. Finally, the cost fimction was synthesized. At this stage all prices and cost were collected or developed, and cash flow statements were generated that would be used 51 a o o g. K •o c .3 a o o - "3 •'a •o g a is u 60 ,>g s/1 a tSO I o IX, •fi T3 ,2 5 p u u Il6l^ :i3: o> w oa m s 52 to calculate rates of rettim. Details of how the specific costs were anived at are covered below. Application of Economic Engineering Approach. To effectively use the economic-engineering method of cost estimation, the study used 10-year historical averages (1991-2000) for feed costs, breeding stock, power costs, fuel costs, interest rates, land values, hay prices, and current (2000) costs for farm equipment as shovyn on Table 4.1. Due to variation in the type of data available for this period, a detailed explanation of how these costs were developed is covered below. Land Land costs are a ten-year average of irrigated land costs for the South Plains Region (Table 4.1). Pasture estabhshment costs are based on 2000-year prices for inputs (Table 4.3). Property taxes assessed on land are based on local tax rates for 2000. Improvements Land improvements are one of the major cost items for an outdoor pig farm. Cost estimation for land unprovements for the 300-sow farm are shown in Table 4.3 and are all based on 2000 prices. The cost of the outside, perimeter fence is based on Osbom and Ervin (2000). Component costs for the electric fence and roadways are collected from local reputable dealers and experts in the field. 53 ON lO w-i ^ p .-^ — ^ O r~- >o p •^ ts rn p O t^ C^ 00 as od rs rr, 0^0 ro CN ^ od cK o r~^ O.—N1 ^' d as •a- as CN (N so IN 00 m •^ •a- m ON p oq O •/-j p P p p p p p o o o o o — O lO lO Os in d rn d >o in i/-i d d d d d (N CN) CNl (NI CS CN) CS CNl c^ 3 ^ o p p p p o o o o c o rn p o o o o o o o o o o a d C: ^ <6 di d d d d d d d d d d d d uS so UI o T3 "a 00 o o O o o p p o o p m ON p p r~- t-^ o o P -* .— ^ ON in in d d Ov' d .J, rs in d 00 a\ d t-^ m' n I> 00 d d IN m (N NO NO m 00 (N| oo NO NO t- in CN ON o r- o F—« o o r- r-l (N oo t- VS c- t> ON rg rn T3- ON m o o o o o NO oi —< d d d d O 00 •^ NO rM n r^] 00 d d —. V 649 . NO o m o m ON Q o o ON CNl p o o o NO oi d p o d d •^ NO NO o CN 00 m ON m o o -a o 3 ON o o o o ta o o o o o ^ o O d d d t-^ d d d d d an d r-- 3 Gas , c (N J : .,O o tu .a ue l ft ft a 3 T3 •^ 3 o •a m _oj 3 a o p. O .a in o o ^ .3 .§ .9 T23 _ ^ O in ON o rJ- in i 3 S ^ d o NO NO ^„rtrNi-H.- 54 The cost estimates for steel components that go to make the hub came from a local dealer (Gebos) and the welding cost estimates were received from the Idalou farm manager (Jerry Smith). The cost for tiie well and irrigation system was developed from cost estimates from local dealers and the High Plains Water District. Farm Equipment The outdoor method of pig rearing uses several pieces of equipment. For the 300- sow pig farm, all equipment was valued at new cost level and depreciated on a simple straight-line method except for the fractor, feed trailer, and mule, which were depreciated on a total annual hours of use basis as shown in Table 4.3. Comparisons were done with other local dealers, and nationally where local dealers were unavailable, to ascertain that the appropriate cost was obtained for all equipment. Breeding stock For the 300-sow farm, 312 sows were assumed to be at the farm at any time (Table 4.3). The extra 12 sows were included to allow time for new arriving sows to get accfimated to the surroundings before having to go into the breeding routine. Sows are depreciated on a two-year basis and sold off after two years. The price of sows was calculated as the product of the sow weight times the price of market hogs plus four cents per potmd, with $100 added to the resuU. The cost of artificial insemination (AI) and catch boars was obtained from boar dealers in the Midwest. 55 Operating Inputs Operating inputs for this study were mainly pig feed and labor. Feed costs were developed using Texas Panhandle fanner com prices and Midwest soybean meal prices. The hog feed was a ration comprised of 85% com and 15% soy meal. To calculate feed price, the Texas Panhandle farmer com price was taken and an elevator markup of $0.40 per 100 pounds was added to achieve the elevator price for com. For soy meal, the Midwest price was taken and a SlO/ton freight fee (fi-eight from the Midwest to Texas) was assessed. A SlO/ton premix charge was added for breeding/gestation feed and $20/ton premix was added for the fanowing feed. The feed mill charged a milling cost of $25/ton for the 300-sow farm. Delivery of the feed to the farm cost the farmer $10/ton. For the 300-sow farm, a manager, paid at the rate of $30,000 per year (before fiinge benefits), was used for one-quarter time. Salary labor, paid $25,000 per year, was used for three-quarter time. One person was hfred for farm labor at the rate of $ 18,000 per year. The 300-sow farm paid a total labor cost equal to two man-years of labor. Fringe benefits were added onto the salaries hsted above to cover social security and workman's compensation. Labor requirements and salary levels were reached after consuhations with the Idalou pig farm manager (Jeny Smith). Cost Estunation For Larger Farms Cost estimation was also done for 600-sow, 1,200-sow, and 5,000-sow farms as shown m Tables 4.4, 4.5, and 4.6. Cost estimation for the larger famas was done in the same manner as cost estimation for the 300-sow fann discussed above. 56 .3 ^ srs CM in m ^ o NO W) oo sn in t^ NO NO O in i—. 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