What Is Your True Cost Of Production?

Introduction

Figuring out pig production costs can be very confusing where differing cost calculations are used. I wish to define the real cost of pig production. This will allow greater accuracy in comparisons among producers. It will also promote greater understanding among feed compounders, processors and retailers with regard to the complexity of pig production costs.

Pig production costs vary widely from one unit to the next. It is important that each pig producer knows his real cost of production. This information will allow him make decisions about his unit. For example, should he reinvest, expand, contract, diversify, etc?

It is convenient to express production costs in cent per kg. deadweight. Costs can then be related easily to the sale price of pigs, which is quoted in cent per kg. deadweight.

The majority of Irish producers underestimate their production cost because they overlook some of the less obvious fixed costs. This provides a false picture to other sectors of the industry that may take advantage of incomplete information.

Feed cost

This is the largest cost in pig production. It can normally vary from approx. 55% to 70% of total costs. This will include the cost of all feeds used and any infeed medication used. Where infeed medication costs are invoiced separately they should be included under Healthcare costs.

Common costs

In addition to feed costs there are certain costs which arise in the vast majority of herds. These are often referred to as "common costs".

1. Labour is the biggest common cost on pig units after feed. But it is rarely fully recorded. There are three main categories of labour to be costed.
1. Hired Labour is the cost of all regular labour and manager(s) employed by
   the enterprise. The cost will include PAYE, PRSI, pensions and any benefits
   such as health insurance, accommodation or vehicle allowances.
2. CasualLabour is the cost of any casual or part-time labour, including
   PAYE & PRSI.
3. Family Labour is the number of family members directly employed on thepig enterprise and an imputed cost based on their estimated salary. Where the owner is the full time manager of the pig enterprise his annual salary is unlikely to be less than €40,000. Where family labour is split between other farm enterprises the cost should relate to the proportion of hours spent on the pig unit. Family labour is rarely properly included in production costs.
2. Healthcare costs include all medicines, veterinary visits, inspections and prescription costs. Vaccine costs now make up about ²/₃ of all medicine costs.
   Wormers and mange treatment are part of healthcare costs.
   Associated equipment such as needles, syringes, etc. are included here.
3. Power and Heat include all electricity and gas costs relating to the enterprise. Fuel used for stand-by generating electricity is included.
4. Transport includes all expenditure on contract transport for the movement of pigs. Where own transport is used for pig haulage include all vehicle road tax, DOE, insurance, lease payments and repair costs relating to pig transport.
5. Manure Handling costs include all costs associated with the transport and spreading of pig manure. It can include expenditure on contract transport/spreading or all the cost of operating the unit's tractor(s) and spreader(s). Include all machinery repair costs, lease payments, tools and workshop material costs relating to manure handling.
6. Repairs and Maintenance costs include repairs and maintenance costs on all property, buildings and equipment relating to the pig enterprise. These costs increase as the unit ages. In general, where repayment of VAT is claimed
   on pig buildings and fixed equipment, this expenditure would be classified as
   capital rather than repairs.
7. Artificial Insemination costs include expenditure on semen and all equipment used for insemination and semen handling.
8. Stock Depreciation costs are calculated using all expenditure on the purchase of breeding gilts and boars, including internal transfer of homebred gilts from the finishing herd. The income from the sale of cull sows and boars is deducted from the expenditure and allowance is made for any changes in breeding stock numbers.
9. Insurance costs include the premia for insuring the pig buildings, permanent fixtures and fittings, house contents, pigs, public liability, employer's liability, loss of income, suffocation, etc. (See Jim Finn's paper at this conference in 1999
   for detailed insurance costs on pig units).
10. Office costs cover telephone, stationary, postage, computer and office equipment and secretarial costs. These should be applied proportionally where they relate to a number of enterprises rather than specifically to the pig enterprise.
11. Miscellaneous costs include all other variable costs relating to the pig enterprise, e.g. water charges and testing, bedding material, straw, dead pig disposal, vermin and fly control and sundry equipment such as dust masks, eartags, spray markers and inkpads.

Herd specific costs

These costs are not common to every unit but can add significantly to the total cost of production. They do require a little extra explanation.

1. Depreciation on Buildings & Equipment
   Pig buildings and equipment lose value during use through wear and tear, corrosion and obsolescence. Buildings normally have a useful life of 20 years, while equipment has a useful life of only 10 years. Approx. 55% of the cost of a pig unit will be spent on the structure, while about 45% is used on fittings or equipment. Each unit will have its own breakdown which must be used and updated as new buildings or equipment are added. Pig units which are heavily loaded with equipment will have higher depreciation costs.
2. The depreciation charge for buildings and equipment may be available from the most recent set of accounts for the pig enterprise.
3. Interest Payments. These should include interest payments on all forms of borrowing related to the pig enterprise. They will include bank overdrafts, bank and private loans and hire purchase schemes. Bank charges will normally be included with interest payments.
4. Imputed Finance Costs. This puts a opportunity cost on the financial investment in the unit which is not borrowed. It represents an estimate of the interest on assets owned in the business. It is calculated by taking the approximate value of all major assets related to the pig unit (i.e. buildings, stock, machinery and land) less total borrowings for pigs, less compounder credit in excess of 30 days. This figure is then multiplied by the prevailing interest rate. The less one has borrowed the higher will be the imputed finance costs. If this money were not invested in the pig enterprise it could be earning an income elsewhere. For a new unit with 50% borrowings (ie €1,550 per sow @ 6% interest) this item could cost about €4/pig or 5.5c/kg. In a case of negative equity there will be no imputed financial cost.
5. Environmental Charges. IPC licence application cost, annual EPA contribution and annual compliance costs, including soil sampling, recording, monitoring, reporting. The reports will include the annual environmental report, nutrient management plans, manure registers and other reports demanded by the IPC licence. In the few cases where odour control systems operate the costs are included here.
6. Rent. The cost will comprise rent on buildings and property used by the pig enterprise including rent for the accommodation of employees of the unit.
7. Contract Finishing. This is an expanding practice where the pig producer supplies weaners and feed and pays the owner of the finishing house a fee per pig (€6-7). In return for the fee the house, labour, water, power bedding and manure spreading are provided.
8. Consultancy & Professional Fees. This category includes accountancy, consultancy, legal and other professional fees.

In this paper I have looked at over 20 cost headings related to pig production. While no one unit will have costs under every heading, few units can avoid using at least 10 headings.

There is no point in ignoring costs. It has to be every producer's aim to control all costs. If you do not measure you can't control. Therefore all costs must be measured or recorded. Margins are too tight to rely on the state of the overdraft or the length of the compounder credit for making informed decisions.

A detailed recording system is indispensable for recording costs. After recording they must be analysed on a per kg dwt basis.

Appendix

Some income/profit terms are explained here.

Total Income

is a statement of total income from pig sales from the pig unit. It includes income from internal sales of stock.

Cash Income

represents the difference between inflow and outflow of cash relating to the pig enterprise. It takes no account of changes in stock numbers, family labour (unless wages are paid), depreciation on buildings and quipment or imputed finance costs.

Final Net Profit

represents the profitability of the business allowing for the cost of family labour and management, and for capital invested in the business.

True breakeven price per kg. is the total real production costs per kg.

Teagasc Services to the Pig Industry

Teagasc provides a range of services to the pig industry in research, advice and education, as well as confidential consultancy on all aspects of pig production, meat processing, feed manufacture, economics and marketing. For further information contact the appropriate office or:
Teagasc Headquarters, Sandymount Avenue, Dublin 4.
Phone 01-637 60 00
Fax 01-6688023
E-mail : @hq.teagasc.ie