By Dr Thomas Volker, Penvaan Group
As with any commodity, it is important to be able to calculate the cost of pork production for many reasons.
A pork producer should know exactly what his costs are, firstly, to be able to assess whether he is selling his pigs at a profit, and secondly whether he can do anything to reduce the cost or improve his operation’s efficiencies in order to increase his profit margin.
On the other hand, there is an increasing interest amongst our pork processing factories to sign contracts with pork producers, where the price is based on the cost of production. To avoid arguments between pork producers and processors and to keep clear of pitfalls in the calculation of the cost, this article will highlight some of the important aspects to keep in mind, as well as using a simple and general formula that can be used on all farms.
Selling pigs on fixed price contract
Advantages to the pork producer:
- A guaranteed income which is higher than his expenses.
- Makes it easier to budget for the contract period.
- Makes it easier to decide on new capital expenditure because of guaranteed prices.
Disadvantages to the pork producer:
- Depending on the negotiated profit margin, if the market prices are in favour of the producer, he will never reap the benefit of the good times.
- If the pork producer has made a mistake in his cost calculation, he will be at a disadvantage.
- If the pork producer increases his efficiency e.g. lower FCR or lower feed costs, will the processor reap all the benefits?
Advantages to the processor:
- Carcasses will be coming in at a set price, which cuts out the huge fluctuations in the market prices, often driven by sentiment.
- The processor can negotiate longer term prices with the retail chain stores. The chain stores expect to have constant prices of pork products supplied.
- Takes guess work out of budgeting for the processor.
- The processors are guaranteed of a supply of carcasses, because they keep the pork producer on the farm by paying him more than his production cost.
Disadvantage to the processor:
- The processor will not benefit during times of overproduction, where pork prices usually are below cost of production.
- If the processor is signing contracts with less efficient farmers, the cost of production will tend to be higher.
A formula that has been agreed upon by many pork producers, is shown here. It is important that the cost structure of various input costs will vary from farm to farm and area to area, as well as from season to season. We highlight just two examples where maize was trading for R850 on safex during October and November 2003 and in January 2004, it was trading for R1 430 per ton. Since the introduction of the new labour law with minimum wages, this has had a big impact on labour intensive operations.
Remember to include the following when calculating your costs:
- Total feed bill from feed company for the month divided by the total tons received. This will give a weighted average price of your feed.
- If you home mix, include the following:
- Raw material costs;
- Mixing costs (labour, electricity, repairs and maintenance, milling loss etc.);
- R O I of feed mill; and
- Transport of raw materials to feed mill and transport of feed to piggery.
As a general rule, a cost of raw materials landed on farm, plus R165 per ton for the other costs (2004) is a good average.
Direct and overhead costs:
- All the costs of running your piggery, eg labour, electricity, medicine, genetics, repairs and maintenance, insurance, administration, telephone interest, etc.
- Transport of pigs to market. This varies a lot and ranges from 30c to 70c per kg, depending on distance to market etc.
- Remuneration of partners and owners etc. Do remember to pay yourself a salary!
Return on investment:
- If you have included interest payments under direct and overhead costs, then work on a fair R O I on the nett value of your piggery ie total value of your piggery less outstanding loans.
- The value of your pig stock must be included under this heading.
This would be the net profit realised, after all expenses have been paid.
The FCR used in the calculation should be a 6 month moving average. Many interesting correlations exist with the FCR factor eg the more dense your feed, the higher the cost per kg but the lower the FCR will be.
A pork producer selling baconers with a high average weight will tend to have a better FCR than the pork producer selling light baconers.
- Charles Street Veterinary Consultancy – Pig Pointers; April 2003 edition.
- Discussions with fellow pig consultants, pork producers and pork marketing groups.