High feed costs prompt strategic management

By Bijon Brown

Editor’s note: Bijon Brown is the Production Economist for Alberta Pork. He can be contacted at bijon.brown@albertapork.com.

With the right knowledge, producers may be able to ship earlier, lighter, to save on feed costs while fitting their packers’ grids and still earning bonuses where possible.

Over the past year, there has been a marked rise in feed costs for hog farmers. With feed costs representing around 63 per cent of the total cost of production – based on Alberta Pork’s 2020 Cost of Production study results – ‘business as usual’ is likely not the best way to look at things.

As the price of feed rises, producers are feeling the pinch, especially if they locked in hog prices months ago that did not take into consideration the higher feed costs seen today. Many producers are searching to find cheaper alternatives to keep their costs in check.

Changes to diets, revisions to herd management practices and even reducing production outright may be some of the options that producers have considered so far. Another option that could be considered is altering the targeted marketing weight.

Maximizing feed savings, while minimizing bonus structure losses, should be the goal of all producers and packers at this time – a win-win approach. When producers proactively reach out to their packers to discuss options, it ensures both sides are working together to achieve a mutual benefit.

Could shipping earlier save on feed?

Around the 100-day mark, average daily gain peaks. Feeding longer could generate unnecessary expenses.

As more days are added to the finisher stage, average daily gain decreases. Producers must decide whether feeding the finisher hog longer to achieve incrementally less lean gain is economically sound. This is where the feed cost and hog value determine the direction to take. What happens if hogs are shipped a week earlier than normal? How much feed could be saved versus the dollars potentially lost in hog value?

Alberta Pork’s estimates indicate that if a producer targets a 128 kilogram (kg) live weight or around 102 kg dressed, it would take approximately 121 days to feed a hog a total of 319 kg of feed. Targeting an earlier marketing date of about a week could result in the marketing of a 121 kg live weight or 97 kg carcass hog and would result in feed savings of 26 kg per hog.

Target weight, feed consumption and packer grids

A live weight of 121 kg, at 113 days on feed, could represent a ‘sweet spot’ for some producers.

Technically, it is possible to save on feed if there is a slight adjustment to shipping dates, but are the feed cost savings enough to noticeably lower your cost of production and offset any loss in revenue?

Estimating cost savings is only half of the battle. Shipping a week earlier means that hogs will be lighter, and this will have implications for how the lighter hogs fit the grid. Will shipping a lighter hog drastically impact the index received? It depends on the packer contract.

To aid in this analysis, actual settlement data was compiled to illustrate the impact on the index of shipping a week earlier. The data used represents more than 170 hogs shipped with an average carcass weight of 105 kg. Shipping a week earlier would, on average, result in a reduction of 5 kg to 100 kg carcass weight.

Shipping a week earlier drops the average carcass weight per load by about 4 kg per hog.

In short, if you are on grid designed for heavier pigs (such as Maple Leaf Foods’ 101 kg grid, the OlyWest 2020 102 Pay plus or the OlyWest 2021 R2 wide grid), then the cost savings of shipping a week earlier would have been wiped out by a loss of premiums due to weight changes in the grid.

Not all contracts are equal when it comes to reaping the benefits of shipping lighter hogs.

However, if you are on a grid designed for slightly lighter pigs (such as Maple Leaf Foods’ 97 kg grid, the OlyWest 2020 98 Pay plus or the OlyWest 2021 Ungraded), then cutting back a week earlier could generate some savings. 

Out of the $11.05 per hog of feed cost savings, if you ship a week earlier on the OlyWest 2020 contract grid, changes could claw back around $6.45 per hog of the savings. If you are on the OlyWest 2021 R2 wide grid or Maple Leaf Foods’ 97 kg grid, then shipping lighter hogs would claw back almost $7.50 and $7.75 per hog, respectively. Since there is only one Britco contract grid available, there are no changes to the Britco grid impacts.

A tool at your fingertips

Diets can be complicated, which is why producers should seek out more than one source of information prior to making any adjustments.

Alberta Pork’s weekly report for producers often includes feed cost estimates and related commentary. These feed costs represent the cost of feed for a market hog from birth to slaughter at the date indicated in the report.

However, producers looking to fill their bins today, based on feeding hogs at current prices, should consider using Alberta Pork’s feed cost modelling calculator, developed by Gowans Feed Consulting. The calculator, updated monthly, is available on Alberta Pork’s website, and a webinar recording is available online for producers who would like to learn how it works. To find the calculator and webinar recording, visit albertapork.com/our-producer-services/feed-cost-modelling/.

Using the calculator, producers can estimate the impact of altering feed ingredient mixes, manufacturing costs, freight costs or altering target weights. Specifically, manufacturing costs, transport costs and the feed budget for breeding stock can be adjusted, along with the feed-to-gain ratio, the number of days on feed, and the initial and ending weights for hogs in each stage of production.

Before making any changes, producers should discuss diets with their nutritionists. The calculator can be useful in the conversation to compare cost impacts, but it should not be taken as a singular source of information. For example, Gowans diets indicate a feed cost of $177.13, but using rations from Manitoba Agriculture and Resource Development, changing the starter to finisher cells in the 129.4 kg live weight example, feed cost increases by $4.15 to $181.28. In the hog industry, where meagre margins mean so much, $4 per hog could mean the difference between profits or losses.

Estimating the impact on producer bonuses

Weight changes also impact the bonus structure on shipped hogs. Except for the Britco contract, shipping lighter hogs could decrease net feed cost savings anywhere from $0.25 per hog on the Maple Leaf contract to $1.15 per hog on the OlyWest 2021 R2 contract. Due to contract bonuses giving slight preference to lighter pigs under the Britco contract, the bonus impact slightly reduces the net cost losses, but it is not enough to turn it to net cost savings.

Overall, slightly adjusting your shipping date may result net savings from $2.40 to $3.60 per hog or $400 to $600 per load shipped. It should be noted here that only weights were changed for this analysis. There may also be changes to the yield, fat content and loin depth that could affect both your index and bonuses.

All in all, producers could save between $400 and $600 per load shipped, depending on their contract.

Ultimately, it boils down to where your cost of production sits relative to your revenue. Alberta Pork’s Cost of Production initiative can provide answers.

Alberta Pork estimates that feeding a hog to 102 kg dressed weight (or 128 kg live weight) would cost around $135.60, based on $420 per metric tonne of wheat on a 97 per cent wheat-based diet. Shipping a week earlier would result in 26 kg less feed at a cost around $124.55. This would mean that, if a producer’s bins are empty and feed grains were purchased at these currently high prices, the producer could buy 26 kg of feed less per hog, which could result in estimated cost savings of around $10.37 per hog. Each farm is different, and these numbers may not represent every producer’s farm.

This is where a conversation with the hog purchaser (packer) would be a good thing, as a slight reduction in weights could be helpful with minimal grid and bonus losses during times of high feed costs. This could also be a benefit to the packer versus bigger shifts in alternative feed usage.

Cost and revenue go hand-in-hand

As always, it is important for producers to consider the relationship between cost of production and revenue as the fundamental measure of profitability. As markets change, so should producers’ strategies for protecting their bottom lines.

By taking a collaborative approach across the value chain, all stakeholders have an opportunity to support each other in ensuring the pork sector remains sustainable in uncertain times.