vdpam 310x basic economic considerations in production medicine dr. locke karriker, dvm, ms, dacvpm...

VDPAM 310xBasic Economic Considerations

in Production Medicine

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

ObjectivesObjectives

• 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



Economics: The “hog pen” definition…

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.



Step 1Step 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



Who Profits?



Pork: Retail Price & Shares 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



Farmer’s Share of Consumers Pork Dollar

Farmer’s Share of Consumers Pork Dollar

0

10

20

30

40

50

60

7019

60

1970

1980

1990

2000



Packer’s Share of Consumers Pork Dollar

Packer’s Share of Consumers Pork Dollar

0

5

10

15

20

25

3019

60

1970

1980

1990

2000



Processing-Distribution-Retail Share of Consumers Pork Dollar

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 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



Packers are moving closer to the consumer by doing further

processing including case-ready meat and developing

their own brand names

Packers are moving closer to the consumer by doing further

processing including case-ready meat and developing

their own brand names



Impact on Industry Structure



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



Fewer Decision Makers with Bigger Impact!!

Fewer Decision Makers with Bigger Impact!!

• Crates versus stalls

• Scaling back sow herd

• Ethanol mandate at the global level



How do I keep up???How do I keep up???

Daily Market Summary from USDA

Daily Livestock Report from CME

http://www.ams.usda.gov/LSMNpubs/PDF_Daily/DHPS.pdf

https://webct.its.iastate.edu/webct/urw/lc820579014031.tp820579056031/Daily%20Livestock%20Report%20from%20CME.pdf

SeasonalitySeasonality

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



Cost of ProductionCost of Production

Cost of Slaughter Hog ProductionIowa State University Calculations, 1987-2005

Cost of Slaughter Hog ProductionIowa State University Calculations, 1987-2005

37

39

41

43

45

47

49

51

53

55

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



System structure impacts cost of production

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


Iowa State University Extensive production


Iowa State University Intensive production



The Makeup of a 2,400 Sow Farm

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



Average Annual CostsAverage 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



Total Variable / Controllable CostTotal Variable / Controllable Cost

$ 532,194.00

What is the Cost Management Ability ?

$23.00 Wp vs. $15.00 Wp = $450,000.00



Step 2Step 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



Key drivers of local productionKey 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



“How do you get paid?”



“How do you get paid?”“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?



“How do you get paid?” “How do you get paid?”

ROI(A) – Return on investment (assets)

Cash Flow

Equity

Net Profit

# / pig space

$ / target head

Number sold



Animal Flow and ThroughputAnimal 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

Fin

ishe

rN

urse

ryS

ow F

arm

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

Fin

ishe

rN

urse

ryS

ow F

arm

…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

Fin

ishe

rN

urse

ryS

ow F

arm

…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

Fin

ishe

rN

urse

ryS

ow F

arm

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

Fin

ishe

rN

urse

ryS

ow F

arm

…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



How do veterinarians provide better throughput and consistent,

predictable, pig flow?

How do veterinarians provide better throughput and consistent,

predictable, pig flow?

More!

Heavier!

Faster!



Relationship between health, pig flow, and throughput


Keep pigs alive

Keep pigs on feed

Eliminate energy wasters:Homeothermic responses

Immune stimulation





Keep pigs alive

Keep pigs on feed

Eliminate energy wasters:Homeothermic responses

Immune stimulation

Health Issues!



Cost of MortalityCost 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 MortalityCost 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



Step 3Step 3

Begin 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.



Step 3Step 3

Begin 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!



Partial Budgets

vs.

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.



02308-Pre-weaning Antibiotics02308-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.



02308-Pre-weaning Antibiotics02308-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.



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)

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 lo

ss p

er

he

ad



02308: Pre-weaning Antibiotics

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).



Use an endpoint that is meaningful to the system!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

$$

/ H

ea

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

$$ /

Hea

d

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

$$

/ H

ea

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

$$

/ H

ea

d



ISU Ag Decision MakerHomepage

ISU Ag Decision MakerHomepage

http://www.extension.iastate.edu/agdm/homepage.html



vdpam 310x basic economic considerations in production medicine dr. locke karriker, dvm, ms, dacvpm...

Documents

production medicine

iowa state university

dacvpm veterinary diagnostic

production economics

exports slide

iowa farrow

market share slide

ron plain slide