1. VDPAM 310x Basic Economic Considerations in Production Medicine Dr. Locke Karriker, DVM, MS, DACVPM Veterinary Diagnostic and Production Animal Medicine Iowa State University College of Veterinary Medicine

2. Food Supply Veterinary Services Veterinary 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

3. Food Supply Veterinary Services Veterinary 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.

4. Food Supply Veterinary Services Veterinary Diagnostic and Production Animal Medicine Iowa State University Step 1 Understand 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

5. Economics and Structure Of the U.S. Swine Industry James Kliebenstein, Ph.D. Professor of Economics Iowa State University Adapted from slides by Dr. Ron Plain

6. 2004 was the 13th consecutive record year for U.S. exports

7. A closed border could be devastating. Example: recent re-instatement of Japanese ban on beef – employees fired, company banned from exporting indefinitely

8. Food Supply Veterinary Services Veterinary Diagnostic and Production Animal Medicine Iowa State University Who Profits?

9. Food Supply Veterinary Services Veterinary Diagnostic and Production Animal Medicine Iowa State University Pork: Retail Price & Shares Producers & packers are losing market share

10. Food Supply Veterinary Services Veterinary Diagnostic and Production Animal Medicine Iowa State University Farmer’s Share of Consumers Pork Dollar

11. Food Supply Veterinary Services Veterinary Diagnostic and Production Animal Medicine Iowa State University Packer’s Share of Consumers Pork Dollar

12. Food Supply Veterinary Services Veterinary Diagnostic and Production Animal Medicine Iowa State University Processing-Distribution-Retail Share of Consumers Pork Dollar

13. Iowa Farrow to Finish Profits, 1994-2005 Source: John Lawrence, Iowa State University

14. Food Supply Veterinary Services Veterinary 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

15. Food Supply Veterinary Services Veterinary Diagnostic and Production Animal Medicine Iowa State University Impact on Industry Structure

16. Food Supply Veterinary Services Veterinary Diagnostic and Production Animal Medicine Iowa State University 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.

18. Food Supply Veterinary Services Veterinary 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

19. Food Supply Veterinary Services Veterinary Diagnostic and Production Animal Medicine Iowa State University How do I keep up??? Daily Market SummaryDaily Market Summary from USDA Daily Livestock Report from CME

20. Seasonality

21. November pork production averaged 20% higher than July

22. November hog prices averaged 20% lower than July

23. Food Supply Veterinary Services Veterinary Diagnostic and Production Animal Medicine Iowa State University Cost of Production

24. Cost of Slaughter Hog Production Iowa State University Calculations, 1987-2005 Source: John Lawrence, Iowa State University

25. Food Supply Veterinary Services Veterinary 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

26. Food Supply Veterinary Services Veterinary Diagnostic and Production Animal Medicine Iowa State University Extensive production

27. Food Supply Veterinary Services Veterinary Diagnostic and Production Animal Medicine Iowa State University Intensive production

28. Food Supply Veterinary Services Veterinary 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

29. Food Supply Veterinary Services Veterinary 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

30. Food Supply Veterinary Services Veterinary 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

31. Food Supply Veterinary Services Veterinary 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

32. Food Supply Veterinary Services Veterinary 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

33. Food Supply Veterinary Services Veterinary Diagnostic and Production Animal Medicine Iowa State University “How do you get paid?”

34. Food Supply Veterinary Services Veterinary 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?

35. Food Supply Veterinary Services Veterinary Diagnostic and Production Animal Medicine Iowa State University

36. Food Supply Veterinary Services Veterinary Diagnostic and Production Animal Medicine Iowa State University “How do you get paid?” ROI(A) – Return on investment (assets) Cash Flow Equity Net Profit # / pig space $ / target head Number sold

37. Food Supply Veterinary Services Veterinary 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…

38. Baseline Performance for Breakeven

39. 2% worse mortality and culls means must breed and farrow more…

40. …or lose money…

41. What happens to this if commingle here?

42. …compensating with farrowing rate doesn’t work.

43. Effect of changes in ADG and F:G on profitability

44. 0.1 # less ADG

45. 0.1 # more F:G

46. Both

47. Food Supply Veterinary Services Veterinary Diagnostic and Production Animal Medicine Iowa State University How do veterinarians provide better throughput and consistent, predictable, pig flow? More! Heavier! Faster!

48. Food Supply Veterinary Services Veterinary Diagnostic and Production Animal Medicine Iowa State University Relationship between health, pig flow, and throughput Keep pigs alive Keep pigs on feed Eliminate energy wasters: Homeothermic responses Immune stimulation

49. Food Supply Veterinary Services Veterinary Diagnostic and Production Animal Medicine Iowa State University Relationship between health, pig flow, and throughput Keep pigs alive Keep pigs on feed Eliminate energy wasters: Homeothermic responses Immune stimulation Health Issues!

50. Food Supply Veterinary Services Veterinary 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

51. 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

52. 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

53. HEALTH _______________________________ genetics

54. Food Supply Veterinary Services Veterinary Diagnostic and Production Animal Medicine Iowa State University Step 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.

55. Food Supply Veterinary Services Veterinary Diagnostic and Production Animal Medicine Iowa State University Step 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!

56. Food Supply Veterinary Services Veterinary Diagnostic and Production Animal Medicine Iowa State University Partial Budgets vs. Enterprise Budgets

57. Iowa State University College of Veterinary Medicine Food Supply Veterinary Medicine Economic Justification Partial 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.

58. Food Supply Veterinary Services Veterinary 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.

59. Food Supply Veterinary Services Veterinary 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!

60. 02308: Pre-weaning Antibiotics (Sow Farm) a,b P<0.01 *Parity used as a covariant in statistical analysis.

61. 02308: Pre-weaning Antibiotics (Sow Farm) a,b P<0.12 *Parity used as a covariant in statistical analysis.

62. 02308: Pre-weaning Antibiotics (Nursery) a,b P<0.01

64. = (extra pigs – cost of treatment) pigs in control group Profit or loss per head

65. Food Supply Veterinary Services Veterinary 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).

66. Food Supply Veterinary Services Veterinary Diagnostic and Production Animal Medicine Iowa State University Use an endpoint that is meaningful to the system! Remember: “How do you get paid?”

68. Food Supply Veterinary Services Veterinary Diagnostic and Production Animal Medicine Iowa State University ISU Ag Decision Maker Homepage http://www.extension.iastate.edu/agdm/hom epage.html