Outlook 2019: Pigs – cost control needed to improve profits
© Tim Scrivener Price volatility is a huge challenge for the pig sector, with the market having seen swings of more than 55p/kg in less than 18 months.
Given tight margins and considerable political uncertainty, all businesses must focus on maximising profits and managing costs to remain viable in these volatile markets and be ready to exploit future opportunities.
Over the past eight years, the average All Pigs Price (APP) has been 148p/kg, just under 3p/kg more than the typical cost of production for UK producers, says Andersons’ Harry Batt.
This margin must cover not only direct production costs but drawings, debt servicing and reinvestment, which poses the question whether it is this enough to remain viable and sustainable long-term.
Key advice
- Focus on core business management practices to maximise profits and reduce costs. Set key business objectives and plan how to achieve them
- Know your cost of production to help make more informed purchasing, marketing, or production system decisions
- Reduce costs where possible, paying particular attention to feed costs – consider all options
- Beware of forthcoming regulatory or policy changes and factor these into business plans
Driving profit
Mr Batt recommends producers use a target of converting at least 15% of turnover into profit, which should enable them to cope during periods of price volatility.
The business management principles to achieve this are the same for pig businesses as any other farming sector, including the need to:
- understand and review the business
- identify the business objectives and whether they are being met
- calculate true cost of production (including drawings, tax, debt reduction and reinvestment) to make informed decisions.
Reducing costs
Inflationary pressures have seen costs, especially feed, increase in real terms, whereas the APP does not increase with inflation.
“Small changes can have a significant effect,” says Mr Batt.
For example; feed costs typically account for more than 60% of total expenses. Reducing them by 5% could save the average producer £3.47 a finished pig, or £6,130 on the “average” holding each year.
Options for improving feed cost control:
Use buying options for feed, with fixed contracts and co-ops offering a more attractive price. Remember to consider your cost of production and if necessary have a budget to inform these decisions
- Review breeding decisions – feed conversion and feed efficiency are important KPIs for selecting breeding stock
- Review alternative feed sources and diet formulation with your nutritionist
- Get the basics right for good feed conversion (for example, housing conditions)
- Review property and finance costs – AHDB says these costs typically account for 20% of producer expenses, but can be overlooked.
Farm Business Survey figures show specialist pig farms have some of the highest average farm debt, at £363,000. Over a typical 20-year term this costs more than £18,000 annually.
Producers should regularly review and update business plans, especially before implementing large-scale changes, Mr Batt adds.
“Ensure any changes, usually an investment, will yield a sufficient return on capital, with a target of greater than 15% ROC.”
Watch out for…
The looming introduction of the government’s Clean Air Strategy could require more producers to obtain environmental permits, incurring additional cost. Currently, only large, intensive pig producers require permits.
The UK’s high welfare standards may provide opportunity to add value to British export products, especially to emerging countries, potentially helping to offset welfare accreditation costs.
Producers have a responsibility to ensure levy money is utilised effectively by organisations such as the AHDB and NFU to deliver effective marketing campaigns.
FW says – Suzie Horne, business editor
Consumption of and spending on pigmeat in the UK rose slightly in the year to the start of November, with extremely keen retail pricing and the relative value of pork against competing meats.
However, consumers are likely to remain challenged through 2019.
UK prices in mid-December were about 24p/kg higher than the EU average. A relatively low pound is helping our exports, but making feed and other imported inputs more expensive.
Our exports are a bright spot. The UK has a huge carcass balancing issue, which means we need to export belly and shoulder meat in particular, something at which on the whole we have been successful.
UK exports to China of both pigmeat and offal have grown substantially faster than for the EU as a whole and our bilateral agreement with China gives hope this trade could continue relatively smoothly once the UK leaves the EU.
The recent outbreak of swine dysentery in East Anglia and reports of African swine fever in continental Europe serve to reinforce the need for top-notch biosecurity and husbandry skills.