FARROW-to- FINISH HOG PRODUCTION in ALABAMA With Emphasis on Sow Leasing Arrangements CIRCULAR DECEMBER 213 1974 AGRICULTURAL EXPERIMENT R. DENNIS ROUSE, Director STATION/AUBURN UNIVERSITY ALABAMA AUBURN, CONTENTS Page INTRODUCTION 3 OBJECTIVES OF STUDY---------- METHOD OF STUDY .------- 4 Cost Procedures OPERATIONS 4 5 FARROW-TO-FINISH Description of Farms and Operators Investment Costs Costs and Returns Farrow-To-Finish Budgets Sow LEASING -- - - - - - - - - - - - - - - 5 6 7 9 - - - 12 Description of Farms and Operators The Leasing Contract Investment Costs Costs and Returns in Sow Leasing Arrangements Sow Leasing Compared with Regular Farrow-To-Finish Operations Leasing and Owning, Farrow-To-Finish Budget Comparison Possible Conditions For Leasing SUMMARY 12 12 13 13 15 16 19 20 -21 CONCLUSIONS FIRST PRINTING 3M, DECEMBER 1974 Auburn University is an equal opportunity employer FARROW- to- FINISH HOG PRODUCTION In ALABAMA with Emphasis on Sow Leasing Arrangements* TONY A. OTTS and M. J. DANNER** INTRODUCTION WINE PRODUCTION in Alabama has become more specialized. Moreover, recent advances in swine production technology and the prospect for favorable prices have increased interest in the swine industry. Production may be confined either to producing feeder pigs or finishing feeders to market weight. Many producers, however, do both jobs in one operation such as in a farrow-to-finish operation. In feeder pig operations, producers raise only feeder pigs selling 40-50-pound pigs at 8 to 10 weeks of age. A finishing operation only depends on purchased feeder pigs that are fed to market weight of 180-240 pounds before being sold. More recently a variation of the farrow-to-finish operation has been introduced to Alabama hog farmers, that of sow leasing where the farmer leases rather than owns breeding stock. The farmer pays a lessor royalties, usually at the time offspring from certain farrowings are sold. Royalties vary in price depending upon which litter is being sold. Since sow leasing has been practiced in Alabama only a few years, farmers are generally unfamiliar with the procedure. A swine producer considering leasing should compare the cost of owning and the cost of leasing breeding stock before entering into any contract. Both sow leasing and regular farrow-to-finish operations are studied in this report. study was conducted as Alabama Research Project 628, supported by State and Federal funds. It is contributing to SM-41, Southern Regional Livestock Marketing Research Project. * Former graduate research assistant and Professor of Agricultural Economics, respectively. Acknowledgment is due Dr. S. C. Bell for his helpful advice and assistance. S '*This OBJECTIVES OF STUDY Many farm operators are now considering swine as a supplemental enterprise in their farming operation. Reliable budgets are needed to determine whether a hog enterprise should be added to the farm situation. Economies of size are very important in any type of farming enterprise, particularly hog production. Information on size economies and advantages of different types and sizes of hog operations are needed to determine which swine operation, if any, to add. This study, thus, had the following specific objectives: 1. to study new methods of hog production such as sow leasing. 2. to determine economies of size in regular farrow-to-finish operations. 3. to develop budgets for farrow-to-finish operations. 4. to compare sow leasing with conventional types of farrowto-finish operations. METHOD OF STUDY Names of farmers with large swine operations were obtained from County Extension Chairmen. Questionnaires were sent to these farmers, seeking basic information about their operations and their willingness to answer additional and more detailed questions. Data were then collected from these farmers by personal interviews. Only producers with larger farrow-to-finish operations and sow leasing arrangements were interviewed. Farrow-to-finish operators had, at least, 70 sows. Sow leasing operators had, at least, 105 sows. Usable questionnaires were obtained for four sow leasing operations and sixteen farrow-to-finish operations. Data were collected for the year 1971. It was not a good price year for hog farmers. Average price for market hogs was $18.78 per hundredweight. The highest monthly average was $21.38, reported at the Selma market. These prices were less than half those reached in 1973. Cost Procedures Grain produced on the farm and fed to hogs was charged at the average price received by farmers for grain as reported by Alabama Crops and Livestock Reporting Service. Grain purchased was charged at the price reported paid by the farmer. All other feeds, such as supplements, minerals, vitamins, antibiotics, and pig starter were charged at the prices reported by farmers. [41 All other variable expenses were charged at the prices reported by farmers. Buildings and equipment were insured at the rate of $.375 per one hundred dollars of estimated value new. Tax charges were based on the average value of land, buildings, and vehicles. These items were taxed at 15 percent of their average value applying the millage rate of the county in which a farm was located. Hired labor was charged at the rate reported by the farmer. Family and operator's labor was charged at $1.65 per hour. Interest was charged at the rate of 6 percent on the average value of fixed capital and the average value of the breeding herd. Depreciation was calculated by the straight line method. Buildings were given an expected life of 20 years with a salvage value of 5 percent. Equipment was divided into two classes, equipment with salvage value such as machinery, feed bins, mixer mills, and equipment without salvage value such as hog waterers, and feeders. Fences, watering systems, lagoons, and equipment without salvage value, were allowed an expected life of 10 years. Miscellaneous items were allowed a useful life of 10 years and a salvage value of 5 percent. FARROW-TO-FINISH OPERATIONS Description of Farms and Operators The types of buildings used for these operations varied. A few farrowing houses were very elaborate but a majority was of simple pole type construction. All buildings had either concrete or slatted floors. The main source of heat for young pigs was heating lamps. Sprinklers and fans were used to cool large hogs in the summer time. Breeds used by these farmers varied from farm to farm. All farmers used crosses in their operations with Yorkshire, Hampshire, and Landrace the predominant breeds. Other breeds, such as Duroc, Poland, and Spotted-Poland were little used. Five of the sixteen producers were using performance tested boars. These are boars that have been tested for rate and efficiency of gain and have also had carcass quality tests conducted on their litter mates. [51 Some of the personal characteristics of the farmers were as follows: Characteristics A ge - - - - - - - - - - - - - - - - - - - - Av. number of years Formal education .--------Experience raising hogs Experience operating a farm- ----- 38.1 14.1 15.8 8.5 Investment Costs Prospective and current swine producers need to know the cost of establishing or expanding hog operations. In this study many factors affected investment costs such as, degree of mechanization, size of operation, and degree of integration. As mechanization was substituted for labor, greater investment was required. Costs per head were affected by the size of operation. Integrated operations with feed mills had greater capital investment. Other things affecting investment costs were location of farms and farmers selection of resources to be used. Some farmers used a minimum amount of resources while others had more resources than were needed. Buildings and equipment made up 49 to 58 percent of the total investment in the three groups, Table 1. Investments were $285.65, $206.55, and $263.08 per sow for small, medium, and large groups, respectively. The buildings in the medium group were of lower cost construction resulting in a lower investment TABLE 1. INITIAL AVERAGE INVESTMENT IN CAPITAL ASSETS PER Sow FOR SELECTED FABJROW-TO-FINISH OPERATIONS, ALABAMA, 1971 Item Land, buildings and equipment Land- - - - - F encing --------------- --Buildings and equipment W ater system ------------Office equipment Vehicles-------------- - --Total (excluding land) ----T ota l-- - - - - - - - - - - - - - - - - - - Brood stock Sows and Producer groups Small' -------- $ 83.12 ------------ 18.96 ----------------- ------ Medium' Large' $ 57.07 13.01 .87 - - 285 .65 9.38 .06 206.55 46.52 9.37 $ 39.69 11.97 263.08 20.83 5.97 35.99 $337.84 $377.53 ----------- 122.23 ------- $436.28 $519.40 -------- $276.32 $333.39 B oars-- - - - - - - - - - - - - - - - - - - T ota l -- - - - - - - - - --- - - - - - - - Total (excluding Total1 Small gilts --------- land) ------- includes herds 2Medium includes herds 'Large 70, 80, 84, 86, 88, 93, and 98 sows. 112, 120, 120, 130, and 155 sows. includes herds of: 180, 183, 200, and 415 sows. of:of: 7 .08 --- ---------------$ 62.75 --------$499.03 --------$582.15 $ 55.67 $ 53.22 7.06 $ 60.28 $336.60 $393.67 $ 65.17 $ 78.22 13.05 $416.06 $455.75 [6] per sow. This is supported by the fact that more labor was required for this group. These farms substituted labor for mechanization. It is unlikely that economies of size was a factor in investment cost in buildings. The medium sized group had the lowest investment per sow with $393.67 as compared to $582.15 for the small group and $455.75 for the large group. This advantage for the middle group probably is explained by the lower investment cost in buildings. Actually, excluding land cost, producers in the large group had higher investment cost in all items, except for vehicle costs, than producers in the medium sized group. However, the large group had lower investment cost per sow in land, fencing, buildings, equipment, and vehicles than did the smaller producer group. Costs and Returns Feed was the major cost item for all producer groups followed by the cost of labor. Feed cost accounted for 70.81 percent, 69.74 percent, and 65.84 percent of all costs for small, medium, and large producer groups, respectively, Table 2. The large group had a considerable advantage in non-feed variable costs. Cost per sow decreased from $61.05 to $31.11 as group size increased from small to large. Fixed costs were lowest for the medium group at $43.40 per sow. The total cost per sow was least for the large producer group at $429.56 and greatest for the small producer group at $705.75. The middle group had a total cost per sow of $602.44. Size economies probably is an influencing factor, but other reasons also exist. Feed costs were much lower for the large group, primarily due to fewer hogs sold per sow. In the middle group lower building cost was a factor. Gross receipts per sow were $630.91, $637.43, and $517.22 for small, medium, and large producer groups, respectively, Table 3. Included in gross receipts were gross sales plus the change in inventory per sow. Gross sales included sale of finished hogs, culled sows, and boars. The medium group achieved greater production from their sows with 14.67 head sold, or 3,118.65 pounds of pork sold per sow. Production dropped considerably in the large group with only 2,369.35 pounds of pork, or only 10.66 head sold per sow. Sales of the small group were slightly less than the medium group with 3,105.38 pounds of pork or 13.57 head per sow. The larger [71 TABLE 2. AVERAGE TOTAL COSTS PER Sow FOR SELECTED FARROW-TO-FINISH OPERATIONS, ALABAMA, 1971 Item Producer groups Medium' Small' Large' Feed cost Feed purchased ------------- $506.26 Inventory change__________________________________ 6.47 Total ---------------------------------------$499.79 Non-feed variable costs Replacement stock ._____________________-___ 12.29 $ $420.17 $289.79 0.00 $420.17 6.95 $282.84 $ 1.69 Veterinary and vaccination -----------------8.60 15.69 Hauling -------------------------------------------------15.65 7.25 Electricity _____________________________ 5.49 8.28 Telephone----------------------- $ 10.05 5.46 Miscellaneous Total---------Fixed costs ___________________________ 2.91 11.23 .56 .78 4.77 2.16 6.27 4.09 4 .00 3.29 1.54 Repairs--------------------------------Interest on operating capital --------------4.32 4.11 $ 61.05 1.76 29.94 $ 44.73 $ 31.11 $ 23.82 Capital depreciation ------------------21.10 --------$ 38.54 $ Insurance-------------------Interest-------------------------------1.16 1.39 Taxes------------------------T otal ----------------------------------------------------Other costs 1.44 $ 71.68 $ 4.99 68.24 20.19 .95 $ 43.40 24.96 1.15 $ 51.32 Land-----------------------------------Labor----------------------------------- $ 3.42 $ 94.14 $602.44 $ 2.38 $ 64.29 $365.27 $429.56 90.72 61.91 Total-----------------------------------------------Total cost (excluding land and labor)-Total cost ___ $ 73.23 $632.52 $705.75 --------------- $508.30 1 Small includes herds of: 70, 80, 84, 86, 88, 93, and 98 sows. 2 Medium includes herds of: 112, 120, 120, 130, and 155 sows. 'Large includes herds of: 180, 183, 200, and 415 sows. producer group compensated for its lack of production with lower costs per sow. Returns to land, labor, and management per sow were a minus $1.61, a positive $129.13, and a positive $151.95 for the small, medium, and large groups, respectively. These returns, of course, do not reflect a charge for land or labor. Returns to labor and management, per sow, with land charged at 6 percent of purchase price, were minus $6.60, a positive $125.71, and a positive $149.57 per sow for the small, medium, and large groups. Using the labor charge reported by the farmer or, $1.65 per hour, the cost of labor was subtracted to give a return to management. Returns to management, per sow, were a minus $74.84 for the small group, a positive $34.99 for the medium group, and a positive $87.66 for the large group. With the investments per sow given in Table 8, the percent earned on investment was a minus 1.31 for the small group, a plus 8.98 for the medium group, and a plus 26.8 for the large group. [8 ] TABLE 3. AVERAGE TOTAL COSTS AND RETURNS PER Sow FOR SELECTED FARROW-TO-FINISH OPERATIONS, ALABAMA, 1971 ItemProducer groups Small1 13.57 3,105.38 $582.17 48.74 $630.91 $499.79 61.05 71.68 $632.52 Medium 2 Large Number of head sold per sow------------Pounds of pork sold per sow-------------------Gross receipts Gross sales----------------------------------Inventory change---------------------------------Total----------------------------------------Costs Feed-------------- ---------------------Non-feed variable-------------------------------Fixed-----------------------Total.---------------------------------------- 14.67 3,118.65 $580.08 57.35 $637.43 $420.17 44.73 43.40 $508.30, $129.13 3.42 125.71 90.72 34.99 393.67 10.66 2,369.35 $440.26 76.96 $517.22 $282.84 31.11 51.32 $365.27 $151.95 2.38 149.57 61.91 87.66 455.75 Returns Returns to land, labor $--1.61 and management-------------4.99 C ost of land------------------------------------6.60 Returns to labor and management------. 68.24 Cost of labor----------------------------------Return to management-------------------------74.84 --------582.15 Average investment ------------------Percent earned on investment-------------1 -1.31 8.98 26.8 Small includes herds of: 70, 80, 84, 86, 88, 93, and 98 sows. 2 Medium includes herds of: 112, 120, 120, 130, and 155 sows. includes herds of: 180, 183, 200, and 415 sows. 'Large In summary, economies of size are indicated since net returns increased as size increased. Also indicated, however, was a decrease in production as size increased. Apparently there were cost reductions that offset this decrease in production. If producers in the large group had received the same production from their sows as the other producers, returns per sow would have been considerably greater. Farrow-To-Finishi Budgets The success or failure of hog production is affected by many factors. Some of these factors are, (1) number of pigs weaned per litter, (2) hogs marketed per sow, (3) feed efficiency or feed conversion ratio, (4) death losses, (5) disease problems, (6) weight of pigs at weaning, and (7) managerial ability of farmer. All factors noted above are influenced by managerial ability. For this reason the nature of returns, that would be above average ability. to-finish operations, tables possible for producers with Budgets have been prepared for both 100- and 200-sow farrow4 and 5. Slightly above average levels [9] farrow-to -finish budgets were computed to determine TABLE 4. ESTIMATED COSTS AND RETURNS FOR A 100-Sow Unit cwt. cwt. cwt. ton head head head mo. mo. yr. yr. FARROW-TO-FINISH OPERATION, BUYING FEED 0 8%)------Total cash expense-----------------($15,700 for 3 mos. at Item Receipts Market hogs--Culled sows- - -Culled boars-- -Total receipts- - - - - - - Cash expenses Fee d- - - - - - - - - - - - - - - - - Replacement stock Veterinarian and H auling - - - - - - - - - - ElectricityTelephone------------------- ---Miscellaneous -------------- -----Rep airs --- - - - - - - - - - - - - - - - - - - - - - -Interest on operating capital Description 1,600 @ 220 lb. each 20 4 Quantity 3,520.00 70.00 14.00 72.08 Rate Amount $140,800.00 2,100.00 280.00 $143,180.00 $115,328.00 1,000.00 1,058.00 752.00 688.00 @@ 350 lb. each 350 lh. each $ 40.00 $ 30.00 $ 20.00 $ 160.00 $ 250.00 $ 10.58 $ 7.52 $ 57.33 $ 5.00 $ 265.00 $ 303.00 $ 314.00 $2,834.00 $ 135.00 $2,194.00 $ 108.00 vaccination complete feed boars 4 100 100 12 12 1 1 60.010 265.00 303.00 314.00 $119,768.00 Fixed costs Capital Total fixed cost-------------- ------- Insurance ------------- ----------Inte re st -- - - - - - - - - - - - - - - - - - - - - - - T a x e s - -- - - - - - - - - - - - - - - - - - - - - - - depreciation --------------- $ 2,834.00 135.00 2,194.0,0 $ 5,271.00 108.00 Returns to land, lahor and management- $ 18,141.00 Assumptions were: (1) 16.2 market hogs produced per sow per year, (2) overall feed ratio 4 pounds of feed per pound of gain. TABLE 5. ESTIMATED COSTS AND RETURNS FOR A 200-Sow Unit Cwt. Cwt. Cwt. FARROW-To-FINISH OPERATION, BUYING Rate FEED Amount Item Description -3,200 @ 220 lb. each 40 8 Quantity Receipts Market hogs----Culled sows- - - Culled boars Total receipts -------Cash expenses .-- - - - - @@ 350 lb. each 350 lb. each 7,040.00 140.00 28.00 $ $ $ 40.00 30.00 20.00 $281,600.00 4,200.00 560.00 $286,360.00 $230,656.002,00.00 2,116.00 1,200.00 1,098.00 60.00 424.00 484.00 502.00 $238,540.00 Feed-------------stoc-Replacement stock.--------------- complete feed boars r--i F-+ N u Veterinarian and vaccination Hauling -----Electricity- - - - - - - - - - Telephone- - - - - - - - -M iscellaneous-------------- -----R epairs --- - - - - - - - - - - - - - - - - - - - - - - Interest on operating capital ($25,100 for 3 mos. at Total cash expense ton head head head mo. mo. yr. yr. 144.16 8 200 200 12 12 1 1 $ 160.00 $ 250.00 $ 10.58 $ 6.00 $ $ 5.00 $ 424.00 $ 484.00 $ 502.00 91.50 8%1) ---------- ------_---_--- Fixed costs Capital depreciation --------------- T alsfixed cost--------------------Assumptions were: Insurance-------------------------------------------In terest- - --T a xe s -------------------------- $3,947.00 S224.00 $4,045.00 $ 186.00 $ 3,947.00 Returns to land, labor and management-. ----------------- c---~ 224.00 4,045.00 186.00 $ 8,402.00 $ 39,418.00 (1) 16.2 market hogs produced per sow per year, (2) overall feed ratio 4 pounds of feed per pound of gain. of production were assumed. More important assumptions were 16 market hogs sold per sow per year and an overall feed ratio of 4 pounds of feed per pound of pork sold. Other budget computations were based on average results of hog operations of similar size included in this study and market conditions existing in early 1974. Assumptions were, (1) market hogs were valued at $40.00 per hundredweight, (2) culled sows were valued at $30.00 per hundredweight, (3) culled boars were valued at $20.00 per hundredweight, and (4) a complete feed ration was valued at $160.00 per ton. For the 100-sow herd total returns to land, labor, and management were $18,141.00 or $181.41 per sow. Total receipts which included the sale of market hogs and culled brood stock, were $143,180.00. The total cost was $125,039.00. The major cost item was feed at $115,328.00. The 200-sow herd was assumed to possess greater economies of size than the 100-sow herd, as indicated by the study data. These lower costs per sow were in the areas of hauling, electricity, repairs, interest on operating capital, and miscellaneous costs. Costs other than these were assumed to be approximately the same on a per unit basis. Total receipts for a 200-sow operation were $286,360.00, Table 5. Total costs were $246,942.00; thus the return to land, labor, and management was $39,418.00. The returns to land, labor, and management per sow were $197.09 per year. SOW LEASING The use of leasing arrangements has occurred in Alabama only within the past few years. The number of hogs grown under leasing contracts, based on this study, is not large, yet such contracts represent a variation of farrow-to-finish production which farmers may wish to consider. Description of Forms and Operators Size of operations ranged from 105 to 282 sows per herd. Crossbreed hogs were produced on all farms. Breeds used were Yorkshire, Hampshire, and Duroc. Age of the operators ranged from 25 to 40 years. All four had attended college, had 8.5 years of farm experience and had 6 years experience in hog production. The Leasing Contract Duration of leasing contracts were for periods that extended from a minimum of 27 months to a maximum of 48 months. At [12] TABLE 6. SCHEDULE OF RENTAL PAYMENTS FOR OVER A PERIOD OF 48 MONTHS Sow LEASING Rental period Date due $15.00 after after after after after after delivery delivery delivery delivery delivery delivery 90% 10% 10% 10% 10% Amount' Gilts 1st _________________________ On delivery 11th mouth 2nd 23rd month 3rd_________________________ 4th 28th month 34th month 5th 6th 40th month 46th month 7th Total rent______________ ------ - value of market hog value of market hog value of market hog value of market hog value of market hog ------------------------------------------------------------------------------------------------$25.00 75% value of market hog $15.00 205% of the value of market hog + + Boars 1st_________________________ On delivery 11th month after delivery 2nd Total rent______________ ------------------------- 200% value of market hog $25.00 200% of the value of market hog 1 These payments are reduced hy a rental refund. The rental refund is derived from the salvage value of the sow-(value of a 220 lh. market hog-$5.00) (0.75). There is no rental refund on hoars. 2 The value of a market hog is the value of a U.S. grade 1-2, 220-pound market hog at the highest average price paid for the month at a selected midwestern market. the end of the period, sows were sold and a new batch of glts was delivered to the producer if both parties agreed the contract. Table 6 shows a schedule of rental payments for sow leasing for a 48-month period. Investment Costs torenew dif- Investment requirements for sow leasing were not greatly ferent from farrow-to-finish operations. Average total investment for sow leasing operations was $458.63 per sow, Table 7. The average investment, for all the regular farrow-to-finish operations studied was $477.19 per sow. Investment per sow in sow leasing arrangements ordinarily should be lower since there is no investin brood stock. This zero investment, however, is somewhat offset by the cost of buildings in this study. Buildings were newer and more modern in the sow leasing arrangements than in most of the regular farrow-to-finish operations. ment Costs and Returns in Sow Leasing Arrangements The total cost per sow for leasing operations was $446.93 or $398.42 excluding land and labor, Table 8. The major cost, as in other operations, was the cost of feed; $276.50 per sow. variable cost was $64.27 per sow, including $39.07 for the feed Non- [ 13]. TABLE 7. INITIAL AVERAGE INVESTMENT IN CAPITAL ASSETS PER SOW FOR SELECTED FARIOW-TO-FINISH AND Sow LEASING OPERATIONS, ALABAMA, 1971 Item Producer groups 1 Sow leasing Farrow-to-finish' Land, buildings and equipment Land -------------------------$ 9.70 Fencing .--------------------------------------5.41 Buildings and equipment.397.17 W ater system ----------------------------2.46 Office equipm ent-----------------------------1.86 Vehicles .----------------------- ---42.03 Total (excluding land)-----------------$448.93 Total.-----------------------------$458.63 Brood stock Sows and gilts------------------------$ .00 Boars -------- ------------------- ---.00 T otal ------------------------------$ .00 Total (excluding land)-----------------$448.93 Total.------------------------ -----$458.63 2 Farrow-to-finish 1Sow $ 59.96 13.43 251.7----------------6 14.41 2.30 68.25 $350.15 $410.11 $ 58.02 $417.23 $477.19 $ 67.08 9.06 leasing includes herds of : 105, 17 5, 175, and 282 sows. includes herds of: 70, 8l0, 84,86, 88, 93, 98, 112, 120, 120, 130, 155, 180, 183, 200, and 415. cost of leasing. Fixed cost was $57.63 per sow and other costs were $48.51 per sow. TABLE 8. AVERAGE TOTAL OPERATIONS ON Sow COSTS PER Sow FOR SELECTED FARROW-TO-FINISHT LEASING CONTRACTS, ALABAMA, 19711 Amount --- -- -- -- -- -- -- -- --- -- Item Feed Non-feed -----------------------variable costs Leasing- costs $7 6 .5 0 2 $ 3 9.0 7 4 .54 6.0 0 3.0 9 55 .20 86 6.98 ----- ------- ----- --- ----- ------- ------- -------- ----- ----- ---- ---------- ---- ---------------- --- --. -- ------ --M iscellaneous ------------------ - - - - - - - - -3 R epa irs -- - - - - - - - - - - - - - - - - - - - - - - -------------------. ------ -Interest on operating capital ----- ------- ----------To ta l . - - - - - - - - - - - - - - - - - - - - - - - - - ----- -- -- -- ---- -- --- ------Fixed costs Capital depreciation------------------------ ---- -- ----- ---- -In surance --- ----------------------------- --- ---- ----- -In terest -- - - - - - - - - - - - - - - - - - - - - - - --- ------ ---- -- ----- --- -- -Ta xe s -- - - - - - - - - - - - - - - - - - - - - - - - - ------- ----- ----- --- ----- --T ota l . - - - - - - - - - - - - - - - - - - - - - - - - - --- - -- - - -- - - -- - Other costs L an d - - - - - - - - - - - - - - - - - - - - - - --- -- -- - - - -- ---- - - - - - - --L aho r -- - - - - - - - - - - - - - - - - - - - - ----- ---- -- ---- -- --- --- -- -T tl--------------------------Total -- ------ ----------cost (excluding land and labor)---- --------- -- ---T otal cost .---- -- -- ----------------- ----------- -- ------ ----- Veterinary and vaccination--------H auling - - - -- -- - - E lectricity ---------------- --------Telephone-- -- -------- ---- -- ----- ---- -- $ 64.2 9 $ 2 7.28 $ 57.63 $ 1.6 1 26 .94 1.80 .9 0 47 .61 $ 48.5 1 2 $ 3 8.4 9 $4 46 .93 1 Sow leasing includes herds of: 105, 175, 175, and 282 sows. [14] TABLE 9. AVERAGE TOTAL COSTS AND RETURNS PER Sow FOR SELECTED FARROW-TO-FINISH OPERATIONS ON Sow LEASING CONTRACTS, ALABAMA, 1971' Item Amount Number of head Sold per sow -------------------------------- Pounds of pork sold per sowGross receipts Cross sales -------------- ----------------------------------------- .7.66 - 1,642.18 Total --- --- - ----- ----- --Costs Feed ---- ---- --- ---- ---- --- ---- ---- --Non-feed variable ----------------------------------64.29 F ixed -- -- - -- - -- - - - - - - - - - - - - - - - - - - -T otal --- --- --- ---- --- --- --Returns Returns to land, labor and management Cost of land -------------------- --------------- - -. -------------- Inventory change $323.45 $4 11.18 87.73------ $276.50 57.63 $398.42 $ 12.76 90 Returns to labor and management -----------------------Average investment-463.88 Percent earned on investment 1 Sow -11.27 Cost of la b or ------------- ----- ----------------------------------------- -Return to managem ent----------------------------------------36.84 --- -----------------__-1.83 47 .61 leasing includes herds of: 105, 175, 175, and 282 sows. Production of swine from sow leasing operations was disappointing. The number of head sold per sow averaged only 7.66 and the average pounds of pork sold per sow was 1,642.18, Table 9. Gross receipts per sow were $411.18, including the sale of market hogs, culled brood stock, and the change in inventory. Returns to land, labor, and management was $12.76. With land charged at 6 percent, the return to labor and management was .$36.34 per sow. Percent earned on investment was a minus 1.83. $11.27 per sow. The return to management only was a minus Sow Leasing Compared With Regular Farrow-To-Finish Operations to-finish Table 10 shows how sow leasing compared with regular operations. Farrow-to-finish operations were farrow- divided into two groups. Group A included farrow-to-finish operations which were smaller than the sow leasing operations and group B included operations that were approximately the same size. Returns to land, labor, and management per sow were minus $1.61 for group A, $78.44 for group B and $12.76 for sow leasing operators. Producers using sow leasing contracts had greater returns than the small group of farrow-to-finish operators but not as great as those in the large group. [I15] TABLE 10. AVERAGE TOTAL COSTS AND RETURNS PER Sow FOR SELECTED LEASING OPERATIONS, ALABAMA, 1971 FARROW-TO-FINISH AND Sow Item Farrow-tofinish group A' 13.57 3,105.38 $582.17 48.74 $630.91 Farrow-to- finish 13.32 group B 2 Sow leasing' 7.66 1,642.18 $323.45 Number of head sold per sow Pounds of pork sold per sow Gross receipts 2,872.98 $595.73 54.10 $649.83 Gross sales- - - - - - - - - - Inventory change To tal-- - - - - - - - - - - - - - - - - - - Costs Feed - - - - - - - - - - - - - - - - - - - - Non-feed variable F ixe d - - - - - - - - - - - - - - - - - - - - - - - - - T o tal - -- - - - - - - - - - - - - - - - - - - - - - - - Returns Returns to land, labor and managem ent--------------- ---- 87.73 $411.18 $276.50 64.29 57.63 $499.79 61.05 71.68 $632.52 $453.73 57.24 60.50 $571.39 $398.42 C ost of landlabor and management Returns to ---------------------- $-1.61 4.99 -6.60 68.24 -74.84 582.15 -1.31 $ 78.44 4.24 $ 12.76 .90 11.86 47.61 74.20 51.85 C ost of labor--Return to ----------- management -----------on ------ 22.35 505.43 12.41 Average investment --------------- Percent earned investment------- -35.75 463.88 -1.83 1 Farrow-to-finish group A includes herds of: 70, 80, 84, 86, 88, 93, and 98 sows. 112, 120, 120, 130, 155, 180, 183, group B includes herds 2Farrow-to-finish and 200 sows. 3Sow leasing includes herds 105, 175, 175, and 282 sows. of: of: Leasing and Owning, Farrow-To-Finish Budget Comparison Since costs and returns are affected by differences in management practices, feed efficiency, and disease control, budgets were constructed to compare sow leasing with regular farrow-to-finish operations. Budgets were confined to the cost of leasing and the cost of owning breeding stock, assuming other cost and returns would not be affected. A time period of 12 years was chosen since hog facilities should last from 10 to 20 years and it is unlikely that a producer could justify construction of permanent type facilities for a briefer period. Moreover, this would afford a completion of three 4-year leasing arrangements. Cost of leasing includes deposits plus rental payments less any refunds. Table 11 shows the order of payments due in one of the more common leasing contracts for a 48 months period being used by Alabama producers. There is no cash rental cost in owning one's breeding stock. The cost of owning, however, includes some costs that would not [I 16] TABLE 11. ADJUSTED SCHEDULE OF RENTAL PAYMENTS OVER A PERIOD OF 48 MONTIS FOR Sow LEASING Rental period Date due Amount 1 $15.00 28% value of market hog 2 20% value of market hog 10% value of market hog 10% value of market hog 10% value of market hog 10% value of market hog + 88% of the value of market hog $30.00 100% value of market hog $30.00 + 100% of the value of market hog Gilts 1st On delivery 2nd ......................... 11th month after delivery 3rd 23rd month after delivery 4th 28th month after delivery 5th 34th month after delivery 6th 40th month after delivery 7th 46th month after delivery Total rent ___________$15.00 Boars 1st 2nd Total rent On delivery 11th month after delivery 1 These payments are reduced by a rental refund. The rental refund is derived from the salvage value of the sow-(value of a 220 lb. market hog-$5.00) (0.75). There is no rental refund on boars. 2The value of a market hog is the value of a U.S. grade 1-2, 220 pound market hog at the highest average price paid for the month at a selected midwestern market. be incurred if sows and boars were rented. These include interest paid on the cost of the original gilts and all boars purchased, and the difference in the purchase price of each boar and gilt and the salvage value. After the initial purchase of the breeding herd, the farmer usually selects replacement gilts from hogs produced on his farm, avoiding a possibly higher price for purchased gilts. In order to make valid comparisons between owning and leasing, the following assumptions were made: 1. Market hogs were valued at $40.00 per hundredweight. 2. Culled sows were valued at $80.00 per hundredweight. 8. Culled boars were valued at $20.00 per hundredweight. 4. The average weight of culled sows and boars was 850 pounds. 5. There were 8 boars for each 100 sows. 6. All leasing rentals were paid within 15 days of invoice. 7. The value of breeding boars was $250.00. 8. The value of breeding gilts was the market cost plus $20.00 per head or $108.00. 9. Interest on borrowed money was charged at 8 percent. 10. The length of leasing agreement was for 48 months. These assumptions approximated market conditions in early [17] 1974 as nearly as possible. It was also assumed that transportation costs would be the same for both operations. A sow leasing budget over a period of 12 years involving three contracts of 100 sows each for 48 months follows: Deposit on gilts, 300 at $15.00 Rent paid on gilts, value of 615 market hogs at $88.00 (with 2% discount) Deposit on boars, 24 at $25.00 Rent paid on boars, value of 48 market hogs 2 at $88.00 (with 2% discount ) Total Less rental refund (350 X 30¢) - ($83 X 75%) $42.75 X 300 Total amount paid Annual cost (Total amount paid/12) SBased on terms of the contract in use. 2 Based on terms of the contract in use. $ 4,500.00 $53,037.60 $ 600.00 $ 4,139.52 $62,277.12 - $12,825.00 $49,452.12 $ 4,121.01 A budget for the cost of owning 100 sows over a period of 12 years follows: Interest on initial cost of breeding herd, (100 gilts at $108.00 X 8% X 12 years) Interest on 24 boars at $250 each, (6,000 X 8% X 4 years average) Difference in purchase price of gilts and salvage value of sows (100 X $108.00 - $105.00)__ Difference in purchase price of boars and salvage value of boars (24 X $250 - 24(350 pounds X 200) Total cost of owning Annual cost (Total/12) $10,368.00 $ 1,920.00 $ 300.00 $ 4,320.00 $16,908.00 $ 1,409.00 The previous budget for owning breeding stock also assumes that the farmer makes no payments on the principal. In actuality a farmer would have to make payments on the principal in order to secure a loan on breeding stock. A budget for owning breeding stock paying interest on the average investment of the breeding stock is as follows: Interest on initial cost of breeding herd, (100 gilts at an average value of $106.50 X 8% X 12 years) Interest on 24 boars at an average value of $160.00 (3,840 X 8% X 4 years averaged) Difference in purchase price of gilts and salvage value of sows (100 X $108.00 - $105.00) Difference in purchase price of boars and salvage value of boars (24 X $250 - 24(850 pounds X 20¢) Total cost of owning Annual cost (Total/12) $10,224.00 $ 1,228.80 $ 300.00 $ 4,320.00 $16,072.80 $ 1,339.40 If interest is paid on the principal, this gives the farmer even greater advantages over leasing. By making payments on the principal the cost of owning is cut by $69.60 per year or $825.20 for the entire period. [18] Possible Conditions For Leasing With the annual cost of owning breeding stock averaging $1,409.00 compared to $4,121.01 for sow leasing, (assuming no payments on principal) it is not likely that swine producers would choose leasing, based entirely on cost differences revealed in budget comparisons. There are other conditions, however, which might favor leasing arrangements. One condition might involve the inability to increase volume without outside assistance. If limited investment capital were available a swine producer might wish to invest all available capital in buildings and equipment choosing to pay rent on breeding stock. Results of this study tend to support this possibility. Producers with leasing arrangements, for example, had greater returns than the regular farrow-to-finish producers with smaller sow herds. Leasing breeding stock may provide an opportunity for the producer to upgrade the quality of his sow herd. Rental expense might very well be justified by increased returns from better quality sows. Of course, the leasing company is not the only source of superior breeding stock. An additional reason for leasing would be the need for managerial assistance by the farmer. Such assistance could be of great value to an inexperienced farmer. However, the contract generally used by these farmers stipulated a management service fee for additional visits above one per year. For this reason, managerial assistance, if greatly needed, could be expensive. There are, of course, possibilities for assistance without charge, such as the county agricultural extension office. If leasing sows will provide at least $2,712.01 worth of extra income per year with the same annual operating cost, the possibility of renting could be considered. Improvements in litter size, feed conversion, percentage lean cuts and freeness from certain diseases would be means of offsetting the additional cost. Specifically, to achieve the additional income would require one of the following: 1. The sale of 153 additional market hogs annually with feed cost assumed to be the only added cost. 2. A price premium of at least $.76 per 100 pounds or $1.68 per market hog above that usually received. 3. A reduction in the overall feed ratio from 4.0 to 3.9 pounds of feed per pound of gain. [19]1 Unless one of these goals can be achieved, leasing of breeding stock is not likely to be a feasible alternative. It is unlikely that sow leasing will improve hog production by amounts mentioned earlier. Quality brood stock can be obtained from sources other than sow leasing in Alabama. Therefore, sow leasing would not be beneficial to most Alabama farmers unless for the reasons other than cost differences which were mentioned previously. However, if sow leasing cost were comparable to the cost of owning, leasing could very well find a place in Alabama hog production, mainly due to it's possible use for expansion purposes. A suggested rental payment schedule designed so that the cost of leasing is comparable to the cost of owning is shown in Table 11. Using the schedule in Table 11, the following budget was constructed. A sow leasing budget over a period of 12 years involving three contracts of 100 sows each for 48 months follows: Deposit on gilts, 300 at $15.00 Rent paid on gilts, value of 264 market hogs at $88.00 (with 2% discount) Deposit on boars, 24 at $30.00 Rent paid on boars, value of 24 market hogs at $88.00 (with 2% discount) $ 4,500.00 $22,767.36 $ 720.00 $ 2,069.76 Total Less rental refund (350 X 30 ) - $30,057.12 $12,825.00 $17,232.12 ($83 X 75%) = $42.75 X 300 Total amount paid The difference in this 12-year budget for leasing and owning is $324.12. This would amount to a cost of $27.00 more per year for sow leasing, which would be comparable to owning breeding stock. If sow leasing is to continue some changes must be made along the lines mentioned above. This is evidenced by the number of people who were displeased with sow leasing in this study and also by a study conducted in Indiana. 2 In the Indiana study over half the farmers producing under sow leasing arrangements did not renew their contracts. SUMMARY In regular farrow-to-finish operations, total investments per sow were $582.15, $393.67, and $455.75 for small, medium, and large An Analysis 2 BURSCH, WILLIAM G. Sow Leasing and Contract Hog Feeding: of Producer Characteristics and Incentives, SB 17, Agricultural Experiment Station, Purdue University, West Lafayette, Indiana, August 1973. [20] groups, respectively. Total cost per sow (excluding land and labor) was $632.52 for the small group, $508.30 for the medium group, and $365.27 for the large group. Total receipts were $630.91, $637.43, and $517.22 per sow for small, medium, and large groups, respectively. Returns to land, labor, and management per sow were minus $1.61, a positive $129.13, and a positive $151.95 for small, medium, and large groups, respectively. Returns to labor and management, per sow, were minus $6.60, a positive $125.71, and a positive $149.57 per sow for the small, medium, and large groups. Management returned a minus $74.84 for the small group, a positive $34.99 for the medium group, and a positive $87.66 for the large group. Percent earned on investment per sow was minus 1.31 for the small group, a plus 8.98 for the medium, and a plus 26.8 for the large group. The total investment per sow for sow leasing operations was $458.63 as compared to $477.19 for all regular farrow-to-finish operations studied. Total cost per sow for leasing operations was $398.42, excluding land and labor cost. Gross receipts per sow for these operations was $411.18 per sow. Return to land, labor, and management was $12.76. Return to labor and management was $11.27 per sow. The return to management was a minus $36.34 per sow and percent earned on investment was a minus 1.83. When returns were compared to regular farrow-to-finish operations, producers using sow leasing contracts had greater returns than the small farrow-to-finish operations but less than larger operations. Budget comparisons made over a 12-year period showed that sow leasing cost an additional $2,712.01 per year over a modern arrangement where breeding stock was owned. Over a 12-year period this would be a difference of $32,544.12. CONCLUSIONS In regular farrow-to-finish operations, investment cost per sow was dependent both on size of operation and type of buildings. The medium producer group's investment was less than the larger producer group because of less modern facilities. Returns increased as size of operation increased. Variations in returns within the groups also indicated that management was an important factor also. The additional cost of rental payments that accompanies leasing operations must be offset by increased production. If costs [21] are not offset by increased efficiency, sow leasing will not be as profitable as regular farrow-to-finish operations of equal size. The exact amount of extra production that is needed to put sow leasing on an equal basis with regular farrow-to-finish operations depends on the contract. In the contract studied, by budget comparisons, at least $2,712.01 worth of extra income was needed to equate the two operations. If sow leasing is to continue to exist or grow, leasing cost must be comparable to the cost of owning. This study indicated that economies of size were present in larger swine operations but due to the lack of proper management in many of these operations the economies were wasted. Management was an important factor in all operations. In large operations with good management economies of size existed. In large operations with poor management no economies were shown. Therefore, it is possible to have economies of size by increasing herd size and by employing adequate management. [22] iiV t W\ith anl agricuiltillal researelh twit in ever'i ma ijor soil area, Un'ivxersitx' serve('s the 0uur of field crop, li estock, foresctrv, and( horticuiltural prioducertis in iieeds eachl banul1. I egioll in \la Exer cr itizeni of ill"2 ® 7 the State lhis a stake this research sinee allyx protiradiii. advanOt age wxays ecoioical of ni benfit th conhie. Research Unit Identification I. 2. 3. 4. 5. 6. 7. 8. 9. 10. 1. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. Tennessee Volley Substation, Belle Mina. Sand Mountain Substation, Crossville. North Alabama Horticulture Suostationr Culimanr Upper Coastal Plair Substation, Winfield. Forestry Unit, Fayette County. Thorsby Foundation Seed Stocks Form, Th rsby Chilton Areo Horticulture Substation, Clanton. Forestry Unit, Coosa County. Piedmont Substation, Camp Hilli Plant Breeding Unit, Tallo see. Forestry Unit, Autouga County. Prattville Experiment Field, Prattville Black Belt Substation, Marion Junction. Tuskegee Experiment Field, Tuskegee. Lower Coostal Plain Substation, Camden. Forestry Unit, Barbor County. Monroeville Experiment Field, Moroeville. Wiregrass Substotion, Head lard. Brewton Experiment Field, Brewton. Ornamental Hortic ulture Field Station, Sprrg Hull. Gulf Coast Substotion, Fairhope.