Knowing the bottom line (Pig Tales)
(Editor’s note: Dr. Rich Barczewski is a retired professor at Delaware State University.)
If you have been following the commodity markets recently, you know all too well that we have seen some fluctuations in commodity prices over the last several years.
Prices for feed grains and protein supplements — and even market prices for livestock — have been fluctuating.
The important thing for any producer to realize is that fluctuating market prices makes it extremely important to know your cost of production.
I can remember — way back when I was in graduate school — that many pork production publications would regularly print articles on the cost of production of pork on a per pound basis.
These numbers were always based on a commercial operation but the actual numbers for a specific farm could vary (sometimes quite substantially) from one farm to another.
With this in mind, it is always a good idea for livestock producers to have an idea of what their input costs are for the specific market animals they produce. To calculate these costs, you need to compile all the costs associated with your production practices including the fixed costs and the variable costs.
Fixed costs are generally known as those costs that would exist regardless if you were raising the animals or not.
Examples would include things like building and facility costs, equipment costs, taxes, labor, depreciation, breeding stock, etc. Variable costs would include things like feed costs, medical costs, and utilities and fuel, marketing and transportation costs, etc.
In order to work out a good budget, it is important that you have a handle on these costs.
Feed is generally the single largest expense in raising livestock so knowing how much feed you require to raise an animal is an important piece of the budgeting puzzle.
Depending on your specific operation and how you run it, you should be able to calculate the total amount of grain and protein supplement that is necessary to produce each animal.
Again, there are often farm to farm differences in animal growth rate and feed efficiency so these figures should be based on how the animals on your particular farm grow. Other things to consider include things like how you are raising your stock.
For example, raising hogs outdoors versus indoors can impact feed costs. Producing hogs in a farrow-to-finish operation will require more feed than purchasing feeder pigs and feeding them to market weight. The one thing that I can assure you is that as grain and soybean meal fluctuates, so will your costs of production.
So, where do you start? The first thing is to keep good records.
Not only is this a good idea from a tax perspective, it also can help you to determine what your specific inputs are on your farm. As a starting point, to grow a pig from 35 to 260 pounds requires between 650 and 700 pounds of feed.
Based on the feed formulations that you use, you should be able to calculate how much of this feed is corn and how much is soybean meal.
Once you do that, it is easier to look at the impact that a higher corn or soybean meal price will impact your overall costs to produce the market animal. It doesn’t matter if you are raising hogs, cattle, sheep, goats or any other animal.
Knowing your bottom line is the first step to understanding where your business is positioned on the profitability scale.
Then you will be in a better position to understand what an increase in grain prices may have on your overall profit potential.
Producers should always work to do things as efficiently and as cost effectively as they can on their farms, but understanding how variations in the market impact the bottom line is the first step towards being prepared when price fluctuations occur.