Post on 23-Feb-2016
description
VDPAM 310xBasic Economic Considerations
in Production Medicine
Dr. Locke Karriker, DVM, MS, DACVPMVeterinary Diagnostic and Production Animal Medicine
Iowa State UniversityCollege of Veterinary Medicine
Food Supply Veterinary ServicesVeterinary Diagnostic and Production Animal Medicine
Iowa State University
Objectives• Understand key drivers of production decisions• Understand general global, regional, and local
influences on production economics• Utilize key concepts and definitions from the
reading assignment in today’s discussion• Begin developing the tools to apply economic
considerations to health recommendations
Food Supply Veterinary ServicesVeterinary Diagnostic and Production Animal Medicine
Iowa State University
Economics: The “hog pen” definition…
• Economics is the practice of determining the most efficient use of resources to achieve a desired objective.
• The universal language of economic study and comparison of potential options is financial with money as the basic unit.
• A large part of production economics is translating biological performance and the impact of health interventions into financial terms so that other stakeholders in the farming process can understand them.
Food Supply Veterinary ServicesVeterinary Diagnostic and Production Animal Medicine
Iowa State University
Step 1Understand the global
environment and national trends in production
The global environment is driven by consumers and their politics, and presents opportunities for producers to succeed or fail depending on their
ability to contribute to the global demand.
Toothbrush Example
Economics and Structure
Of the
U.S. Swine Industry
James Kliebenstein, Ph.D.Professor of EconomicsIowa State UniversityAdapted from slides by Dr. Ron Plain
U.S. Pork Exports
0
200
400
600
800
1000
1200
Thousand Metric Tons
2004 was the 13th consecutive record year for U.S. exports
U.S. Pork Exports
0
200
400
600
800
1000
1200
Thousand Metric Tons
2004 was the 13th consecutive record year for U.S. exports
A closed border could be devastating.Example: recent re-instatement of Japanese ban on beef –
employees fired, company banned from exporting indefinitely
Food Supply Veterinary ServicesVeterinary Diagnostic and Production Animal Medicine
Iowa State University
Who Profits?
Food Supply Veterinary ServicesVeterinary Diagnostic and Production Animal Medicine
Iowa State University
Pork: Retail Price & Shares
0
50
100
150
200
250
300
60 63 66 69 72 75 78 81 84 87 90 93 96 99 02
Cen
ts P
er R
etai
l Pou
ndFarm Share Kill & Cut Share Proc & Dist & Ret
Producers & packers are losing market share
Food Supply Veterinary ServicesVeterinary Diagnostic and Production Animal Medicine
Iowa State University
Farmer’s Share of Consumers Pork Dollar
0
10
20
30
40
50
60
7019
60
1970
1980
1990
2000
Food Supply Veterinary ServicesVeterinary Diagnostic and Production Animal Medicine
Iowa State University
Packer’s Share of Consumers Pork Dollar
0
5
10
15
20
25
3019
60
1970
1980
1990
2000
Food Supply Veterinary ServicesVeterinary Diagnostic and Production Animal Medicine
Iowa State University
Processing-Distribution-Retail Share of Consumers Pork Dollar
0
10
20
30
40
50
60
7019
60
1970
1980
1990
2000
Iowa Farrow to Finish Profits, 1994-2005Iowa State University Calculations
-70
-50
-30
-10
10
30
50
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
$ Per Head
Source: John Lawrence, Iowa State University
Food Supply Veterinary ServicesVeterinary Diagnostic and Production Animal Medicine
Iowa State University
Packers are moving closer to the consumer by doing further
processing including case-ready meat and developing
their own brand names
Food Supply Veterinary ServicesVeterinary Diagnostic and Production Animal Medicine
Iowa State University
Impact on Industry Structure
Food Supply Veterinary ServicesVeterinary Diagnostic and Production Animal Medicine
Iowa State University
Number of U.S. Hog Farms. 1965-2004
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1965
1970
1975
1980
1985
1990
1995
2000
The number of U.S. hog farms has declined each year since 1980
Source: USDA-NASS
In 2004 there were 60,830 farms that owned hogs and 69,420 farms that
raised hogs.
Average Inventory Per U.S. Hog Farm
0100200300400500600700800900
100019
80
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
Food Supply Veterinary ServicesVeterinary Diagnostic and Production Animal Medicine
Iowa State University
Fewer Decision Makers with Bigger Impact!!
• Crates versus stalls
• Scaling back sow herd
• Ethanol mandate at the global level
Food Supply Veterinary ServicesVeterinary Diagnostic and Production Animal Medicine
Iowa State University
How do I keep up???
Daily Market Summary from USDA
Daily Livestock Report from CME
Seasonality
Avg U.S. Daily Pork Production, 1990-99
60
62
64
66
68
70
72
74
76
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Million Lbs
November pork production averaged 20% higher than July
U.S. Monthly Average Hog Price, 1990-99
36
38
40
42
44
46
48
50
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
$/cwt
November hog prices averaged 20% lower than July
Food Supply Veterinary ServicesVeterinary Diagnostic and Production Animal Medicine
Iowa State University
Cost of Production
Cost of Slaughter Hog ProductionIowa State University Calculations, 1987-2005
37394143454749515355
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Marketing Month
$ Per Live Cwt
Source: John Lawrence, Iowa State University
Food Supply Veterinary ServicesVeterinary Diagnostic and Production Animal Medicine
Iowa State University
System structure impacts cost of production
• Extensive: LOWER capital investment, LOWER fixed costs, LOWER efficiency, HIGHER variable costs
• Intensive: HIGHER captial investment, HIGHER fixed costs, HIGHER efficiency, LOWER variable costs
Food Supply Veterinary ServicesVeterinary Diagnostic and Production Animal Medicine
Iowa State University Extensive production
Food Supply Veterinary ServicesVeterinary Diagnostic and Production Animal Medicine
Iowa State University Intensive production
Food Supply Veterinary ServicesVeterinary Diagnostic and Production Animal Medicine
Iowa State University
The Makeup of a 2,400 Sow Farm
• Facility cost– $ 1.7 Million
• Staff– 12 = 9 Team members, 2 DTL’s , 1 Farm manager.
• Animal Inventory cost– $ 432,000.00
• Profit potential at budget– $ 739,530.00
Food Supply Veterinary ServicesVeterinary Diagnostic and Production Animal Medicine
Iowa State University
Average Annual Costs• Personnel Cost
– $ 265,560.00• Property Cost
– $ 52,578.00• Utility and Service Cost
– $ 110,298.00
• Vet/Med Cost – $ 44,856.00
• Supply Cost – $ 37,902.00
• Feed Cost – $ 30,000.00
Food Supply Veterinary ServicesVeterinary Diagnostic and Production Animal Medicine
Iowa State University
Total Variable / Controllable Cost
$ 532,194.00
What is the Cost Management Ability ?
$23.00 Wp vs. $15.00 Wp = $450,000.00
Food Supply Veterinary ServicesVeterinary Diagnostic and Production Animal Medicine
Iowa State University
Step 2
Understand the general drivers of local production
These are the conditions that drive daily operational decisions and are the broad
categories that have the most impact on the economics of individual production systems
Food Supply Veterinary ServicesVeterinary Diagnostic and Production Animal Medicine
Iowa State University
Key drivers of local production• Value
– Does anybody want what you have? What is it worth to you?• Animal flow
– Life cycle is long relative to other production enterprises• Throughput
– How much production is required by market or farm objectives?• Target Market
– Niche such as antibiotic free, taste, “welfare friendly”– Commodity– Export
• Health– Where Veterinarians impact all the rest
Food Supply Veterinary ServicesVeterinary Diagnostic and Production Animal Medicine
Iowa State University
“How do you get paid?”
Food Supply Veterinary ServicesVeterinary Diagnostic and Production Animal Medicine
Iowa State University
“How do you get paid?”
• Explains the producers interpretation of VALUE– Profitability?– Market niche?
• Taste differentiation• Brand name• Antibiotic free
– Adding value to crop operations?
Food Supply Veterinary ServicesVeterinary Diagnostic and Production Animal Medicine
Iowa State University
Food Supply Veterinary ServicesVeterinary Diagnostic and Production Animal Medicine
Iowa State University
“How do you get paid?”
ROI(A) – Return on investment (assets)Cash Flow
EquityNet Profit
# / pig space$ / target headNumber sold
Food Supply Veterinary ServicesVeterinary Diagnostic and Production Animal Medicine
Iowa State University
Animal Flow and Throughput
You will see more on this later in the course, but a few relevant points now…
Baseline Performance for Breakeven
Market (throughput) Target 1200Culls 5%Mortalities 5%Must Exit Nursery 1333Culls 2%Mortalities 2%Must Wean 1389PWM 10%BA 12Sows Must Farrow 116
Farrowing Rate 92.0%Sows Must Breed 126Culls 5%Deads 14%Minimum Sow Inventory 154
Fini
sher
Nur
sery
Sow
Far
m
2% worse mortality and culls means must breed and farrow more…
Market (throughput) Target 1200 1200Culls 5% 7%Mortalities 5% 7%Must Exit Nursery 1333 1395Culls 2% 4%Mortalities 2% 4%Must Wean 1389 1517PWM 10% 12%BA 12 12Sows Must Farrow 116 126
Farrowing Rate 92.0% 92.0%Sows Must Breed 126 137Culls 5% 5%Deads 14% 14%Minimum Sow Inventory 154 170
Fini
sher
Nur
sery
Sow
Far
m
…or lose money…
Market (throughput) Target 1200 1200 1101Culls 5% 7% 7%Mortalities 5% 7% 7%Must Exit Nursery 1333 1395 1281Culls 2% 4% 4%Mortalities 2% 4% 4%Must Wean 1389 1517 1392PWM 10% 12% 12%BA 12 12 12Sows Must Farrow 116 126 116
Farrowing Rate 92.0% 92.0% 92.0%Sows Must Breed 126 137 126Culls 5% 5% 5%Deads 14% 14% 14%Minimum Sow Inventory 154 170 156
Fini
sher
Nur
sery
Sow
Far
m
…or lose money…
Market (throughput) Target 1200 1200 1101Culls 5% 7% 7%Mortalities 5% 7% 7%Must Exit Nursery 1333 1395 1281Culls 2% 4% 4%Mortalities 2% 4% 4%Must Wean 1389 1517 1392PWM 10% 12% 12%BA 12 12 12Sows Must Farrow 116 126 116
Farrowing Rate 92.0% 92.0% 92.0%Sows Must Breed 126 137 126Culls 5% 5% 5%Deads 14% 14% 14%Minimum Sow Inventory 154 170 156
Fini
sher
Nur
sery
Sow
Far
m
What happens to this if commingle here?
Market (throughput) Target 1200 1200 1101 1200Culls 5% 7% 7% 7%Mortalities 5% 7% 7% 7%Must Exit Nursery 1333 1395 1281 1395Culls 2% 4% 4% 4%Mortalities 2% 4% 4% 4%Must Wean 1389 1517 1392 1517PWM 10% 12% 12% 12%BA 12 12 12 12Sows Must Farrow 116 126 116 126
Farrowing Rate 92.0% 92.0% 92.0% 100.3%Sows Must Breed 126 137 126 126Culls 5% 5% 5% 5%Deads 14% 14% 14% 14%Minimum Sow Inventory 154 170 156 156
Fini
sher
Nur
sery
Sow
Far
m…compensating with farrowing rate doesn’t work.
BaselineFeed cost / ton $133Market Weight 285.0Start Weight 60ADG 1.91F:G 2.87Days to Market 118Feed consumed (t) 0.323Feed cost / head $42.94Feed Savings 0Market Price ($.50) $142.50Loss/Gain per head $0.00
Effect of changes in ADG and F:G on profitability
Baseline .1 ADG_FTFeed cost / ton $133 $133Market Weight 285.0 273.2Start Weight 60 60ADG 1.91 1.81F:G 2.87 2.87Days to Market 118 118Feed consumed (t) 0.323 0.306Feed cost / head $42.94 $40.69Feed Savings 0 $2.25Market Price ($.50) $142.50 $136.61Loss/Gain per head $0.00 -$3.64
0.1 # less ADG
Baseline .1 ADG_FT .1 F:G_FTFeed cost / ton $133 $133 $133Market Weight 285.0 273.2 285.0Start Weight 60 60 60ADG 1.91 1.81 1.91F:G 2.87 2.87 2.97Days to Market 118 118 118Feed consumed (t) 0.323 0.306 0.334Feed cost / head $42.94 $40.69 $44.44Feed Savings 0 $2.25 -$1.50Market Price ($.50) $142.50 $136.61 $142.50Loss/Gain per head $0.00 -$3.64 -$1.50
0.1 # more F:G
Baseline .1 ADG_FT .1 F:G_FT Both_FTFeed cost / ton $133 $133 $133 $133Market Weight 285.0 273.2 285.0 273.6Start Weight 60 60 60 60ADG 1.91 1.81 1.91 1.81F:G 2.87 2.87 2.97 2.97Days to Market 118 118 118 118Feed consumed (t) 0.323 0.306 0.334 0.317Feed cost / head $42.94 $40.69 $44.44 $42.18Feed Savings 0 $2.25 -$1.50 $0.76Market Price ($.50) $142.50 $136.61 $142.50 $136.79Loss/Gain per head $0.00 -$3.64 -$1.50 -$4.95
Both
Food Supply Veterinary ServicesVeterinary Diagnostic and Production Animal Medicine
Iowa State University
How do veterinarians provide better throughput and consistent,
predictable, pig flow?
More!Heavier!Faster!
Food Supply Veterinary ServicesVeterinary Diagnostic and Production Animal Medicine
Iowa State University
Relationship between health, pig flow, and throughput
Keep pigs aliveKeep pigs on feed
Eliminate energy wasters:Homeothermic responses
Immune stimulation
Food Supply Veterinary ServicesVeterinary Diagnostic and Production Animal Medicine
Iowa State University
Relationship between health, pig flow, and throughput
Keep pigs aliveKeep pigs on feed
Eliminate energy wasters:Homeothermic responses
Immune stimulation
Health Issues!
Food Supply Veterinary ServicesVeterinary Diagnostic and Production Animal Medicine
Iowa State University
Cost of Mortality
• Older mortality is more expensive• Highly variable from system to system• Nursery:
– 1% change is equivalent to roughly $0.50 - $0.60 per head remaining in the group
• Finisher:– 1% change is equivalent to roughly $1.15-
$1.30 per head remaining in the group
• Example: A nursery room of 1200 pigs closes out with 4% mortality.
• 1200 – 4% = 1152 pigs remaining• 1152 * $0.55 * 4 = $2,534.40• Watch ADJUSTED numbers that factor
mortalities out of performance data. Can lead to “hidden” costs
Cost of Mortality
Market Target
Reproductive Performance / Sow
Longevity
Health
Consistent Pig Flow &
Value
Throughput
PWM
Nursery mort $0.55
Finisher mort $1.30
ADG $3.64
F:G $1.50
HEALTH_______________________________
genetics
Food Supply Veterinary ServicesVeterinary Diagnostic and Production Animal Medicine
Iowa State University
Step 3Begin developing the tools to
evaluate the economy of health recommendations and translate the findings into financial terms.
These activities are farm specific! The right plan on Farm A may bankrupt
Farm B.
Food Supply Veterinary ServicesVeterinary Diagnostic and Production Animal Medicine
Iowa State University
Step 3Begin developing the tools to
evaluate the economy of health recommendations and translate the findings into financial terms.
These activities are farm specific! The right plan on Farm A may bankrupt
Farm B.THERE IS NO UNIVERSAL, BEST TREATMENT,
EVER!
Food Supply Veterinary ServicesVeterinary Diagnostic and Production Animal Medicine
Iowa State University
Partial Budgetsvs.
Enterprise Budgets
Iowa State University College of Veterinary MedicineFood Supply Veterinary Medicine
Economic JustificationPartial Budgeting Approach
1. Additional revenue from the change (r1)2. Reduced costs from the change (c1)3. Increased costs as a result of the change (r2)4. Cost of implementing the change (c2)
If (r1+c1) > (r2+c2) then the proposed change is [probably!] justified.
Food Supply Veterinary ServicesVeterinary Diagnostic and Production Animal Medicine
Iowa State University
02308-Pre-weaning Antibiotics• Objectives
– To determine the most cost-effective pre-weaning antibiotic regimen for the production system.
• Design– F49: Consecutive farrowing rooms (n=30) were
randomly assigned to received either Naxcel (8 mg/ml), Biomycin (100 mg/ml) or no pre-weaning antibiotics. Both antibiotic treatments were given within 24 hours post-farrowing (after cross-fostering; 1.0 ml/pig) and at processing (approximately day 4 post-farrowing; 2.0 ml/pig).
– Pre-weaning mortality rate, reason for death and nursery production compared across treatment.
Food Supply Veterinary ServicesVeterinary Diagnostic and Production Animal Medicine
Iowa State University
02308-Pre-weaning Antibiotics• Objectives
– To determine the most cost-effective pre-weaning antibiotic regimen for the production system.
• Design– F49: Consecutive farrowing rooms (n=30) were
randomly assigned to received either Naxcel (8 mg/ml), Biomycin (100 mg/ml) or no pre-weaning antibiotics. Both antibiotic treatments were given within 24 hours post-farrowing (after cross-fostering; 1.0 ml/pig) and at processing (approximately day 4 post-farrowing; 2.0 ml/pig).
– Pre-weaning mortality rate, reason for death and nursery production compared across treatment.
NOTE: A correctly designed and analyzed trial is a
prerequisite! Otherwise, results can be valueless or
worse, lead to the wrong conclusion!
02308: Pre-weaning Antibiotics(Sow Farm)
Item*
Biomycin
Naxcel
No Antibiotic
SE
P =
nRooms 10 10 10 ___ ___
nPigs 12,159 12,236 12,008 ___ ___
Mortality Rate (%) 11.75a 9.26b 11.39a 0.56 0.009
a,b P<0.01*Parity used as a covariant in statistical analysis.
02308: Pre-weaning Antibiotics(Sow Farm)
Item*
Biomycin
Naxcel
No Antibiotic
SE
P =
Lay-on (%) 6.34a 5.16b 6.25a 0.39 0.07 Starved (%) 1.61a 1.00b 1.36a 0.16 0.03 Scours (%) 0.75a,b 0.46a 0.92b 0.14 0.08 a,b P<0.12*Parity used as a covariant in statistical analysis.
02308: Pre-weaning Antibiotics(Nursery)
Item
Biomycin
Naxcel
No Antibiotic
SE
P =
nPigs Wean 1072.0a 1115.6b 1064.0a 11.64 0.009 KOA (Nur) 1.62 1.37 1.85 0.35 0.63 On Weight 11.89 11.66 12.26 0.43 0.61 Off Weight 39.11 39.53 38.71 1.45 0.92 Mortality 3.53 2.64 2.95 0.66 0.62 ADG 0.73 0.73 0.69 0.03 0.60 a,b P<0.01
-$0.20
$1.81
$0.00
-$0.50
$0.00
$0.50
$1.00
$1.50
$2.00
Biomycin Naxcel No Antibiotics
02308 Pre-Wean Antibiotics
-$0.20
$1.81
$0.00
-$0.50
$0.00
$0.50
$1.00
$1.50
$2.00
Biomycin Naxcel No Antibiotics
02308 Pre-Wean Antibiotics
= (extra pigs – cost of treatment) pigs in control group
Pro
fit o
r los
s pe
r hea
d
Food Supply Veterinary ServicesVeterinary Diagnostic and Production Animal Medicine
Iowa State University
02308: Pre-weaning Antibiotics
• Naxcel treatment resulted in lower pre-weaning mortality than Biomycin treatment or No Antibiotic treatment.
• Advantage to Naxcel appears to be due to preventing lay-ons, starve-outs and scours.
• Recommended to continue with two-shot Naxcel program (farrowing, processing).
Food Supply Veterinary ServicesVeterinary Diagnostic and Production Animal Medicine
Iowa State University
Use an endpoint that is meaningful to the system!
Remember:
“How do you get paid?”
Relative Profit / Head LIVE ALL
$0.00
$3.42
$0.84
-$1.00-$0.50$0.00$0.50$1.00$1.50$2.00$2.50$3.00$3.50$4.00$4.50$5.00$5.50$6.00$6.50$7.00
Control 1 2
Treatment
$$ /
Hea
dRelative Profit / Head LIVE SIG
$0.00
$1.95
$3.06
-$1.00-$0.50$0.00$0.50$1.00$1.50$2.00$2.50$3.00$3.50$4.00$4.50$5.00$5.50$6.00$6.50$7.00
Control (Current) Treatment 1 Treatment 2
Treatment
$$ /
Head
Relative Profit / Head INT SIG
$0.00
$2.48 $2.47
-$1.00-$0.50$0.00$0.50$1.00$1.50$2.00$2.50$3.00$3.50$4.00$4.50$5.00$5.50$6.00$6.50$7.00
Control 1 2
Treatment
$$ /
Hea
d
Relative Profit / Head INT ALL
$0.00
$6.23
-$0.17
-$1.00-$0.50$0.00$0.50$1.00$1.50$2.00$2.50$3.00$3.50$4.00$4.50$5.00$5.50$6.00$6.50$7.00
Control 1 2
Treatment
$$ /
Hea
d
Food Supply Veterinary ServicesVeterinary Diagnostic and Production Animal Medicine
Iowa State University
ISU Ag Decision MakerHomepage
http://www.extension.iastate.edu/agdm/homepage.html