You probably have a good idea how much it costs you to produce a pig, but it’s good business to regularly review, update and really know your cost of production (COP).
Knowing this is the key to maximizing margins and ensuring the financial health of your operation. After all, even if margins are in the black today, continually tracking your COP offers you the opportunity to quickly make changes when leaner times come back around.
“Generating and interpreting COP data enables you to make the best management decisions possible,” says Lee Schulz, associate professor of economics at Iowa State University. “The old saying is true, ‘you can’t manage what you don’t measure.’ Understanding where costs are occurring, the interactions among costs and production practices is critical.”
And, when costs are changing rapidly – either higher or lower – it’s important to monitor them closely and routinely to take advantage of opportunities, he adds.
Monitor two types of pork production costs
COP can vary greatly between farms and between production systems – farrow-to-finish, wean-to-finish, feeder pig production and finishing operations — but two types of costs apply to all.
Fixed costs: This includes labor, depreciation, long-term interest, taxes, equipment and facilities, breeding stock and insurance. These costs hold mostly steady each month, however, maximizing production will spread costs out over more animals, while the inverse is true for under producing.
Variable costs: This includes feed, weaned and feeder pig prices, veterinary and medicine, transportation and marketing, custom services, utilities and fuel, repairs and interest on operating costs. These costs are influenced by factors such as seasonal crop production and carryover stocks for feed. Also, disease issues that surface and require treatments and veterinary services.
Within fixed costs there are few opportunities to adjust your margins, so variable costs are the first to come under the microscope. Without question, feed costs account for the largest cash expense and has a major impact on a farm’s total COP. “Feed represents over half of the total cost and it’s the most variable,” Schulz notes.
There are pricing and purchasing options for feed and other variable cost items, but be aware that severe cuts also can present diminishing returns. “Cost-cutting moves that erode production, animal care or quality can result in lower revenue and therefore, less profit,” Schulz says.
Managing costs to generate revenue
Of course, the other side of the COP equation is the revenue that your hogs generate. “Many producers believe lowering costs automatically improve profit, but a marketing plan that maximizes revenue also is necessary,” Schulz says. “Instead of becoming a low-cost producer, think about being the best manager of costs and a better marketer of hogs.”
This may shift where you spend money or could even increase certain expenses, he adds. Specific revenue strategies will vary by the type of production system you operate and whether you’re selling a weaned pig, feeder pig or a finished hog.
Establish your baseline calculations
While the pig’s end-weight may vary, depending on the type of system you’re operating, there are common inputs and outputs to determine your COP.
Here is what your COP calculations need to include regardless of ending weights.
Feed Costs:
- Corn – $/head
- Soybean Meal – $/head
- DDGS – $/head
- Feed Processing – $/head
- Total – $/head
Non-Feed Costs:
- Variable Costs – $/head
- Operating Interest – $/head
- Fixed Costs – $/head
- Total – $/head
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