Economic Assessment of Mortality in Wean to Finish Production
Introduction
Mortality reduces gross income but also changes the cost of pig production. Accurately projecting the impact of mortality on net income is important to determine if the marginal income of lower mortality is greater than the marginal cost of improving mortality. This fact sheet focuses on the potential economic benefit of improving mortality which builds on previous work (Crooks et al., 1993; Holtkamp, 2008; Dhuyvetter, 2014). This calculation is not a trivial task because the economic value of lowering mortalities depends on various prices and production efficiencies.
Objectives
- To provide a tutorial and decision aide to assess the economic opportunity of changing mortality rates on a wean to finish operation.
- To show how a sensitivity analysis around key variables is an important component of any economic analysis attempting to weigh the projected benefits of mortality-reducing strategies against their anticipated costs.
Projecting economic opportunity
A budget model is used to compare net income changes, or the economic opportunity, resulting in changes in pig mortality. It is important to understand what is and is not impacted in the budget calculation by changes in mortality (Holtkamp and Schulz, 2021). Fixed costs do not change as mortality changes. It is true that when a pig dies an operation’s fixed costs are spread over fewer pigs, but that does not mean that total fixed costs have changed. What determines the value of a pig that dies is the opportunity cost, or the profits realized had the death loss not occurred. The total cost invested in a pig at the time it dies does not represent the value of a lost pig. Feeder pig costs and feed consumed, for example, are sunk costs as they obviously cannot be recovered. The level or degree of sunk costs, though, is dependent upon feed prices and when death loss occurs during the feeding period. This can be thought of as potential cost savings. The following are the income and cost factors that are impacted by pig mortalities.
Income Changes
Market hog sales. The inputs are the carcass price, weight of pigs sold, and mortality rate. The mortality rate multiplied by the value of pigs sold is the lost revenue. As the sale price of market hogs increases the lost revenue also increases, and vice versa.
Value of manure. The value of manure nutrients per head sold is the main input. The value is decreased by the percent mortality rate and the timing of pig death loss during the feeding period. The earlier or lighter weight the pig dies during the feeding period, the less the manure value.
Cost Changes
Feed. The inputs are the cost of feed, feed efficiency, weight gain of pigs, and when pigs die during the feeding period. Mortalities reduce the amount of feed fed as projected in the budget. The timing of death loss during the feeding period affects how much feed is not consumed. An average weight for mortalities is used as an input. The weight input is used to determine how much of the projected feed cost is reduced. Cost of feed purchased per head is reduced by the mortality rate multiplied by the normal feed cost multiplied by the percent of feed value not consumed. The feed cost savings is greater with increased mortality, and vice versa. Also, if pigs die earlier in the feeding period versus later, the feed cost savings is greater since less feed is consumed.
Feed processing and delivery. This is similar to the feed cost calculation with an added input of the cost per ton to mix and deliver feed. As pigs die and less feed is consumed there is less cost to manufacture and deliver feed. Cost of feed mixing and delivery per head is reduced by the mortality rate multiplied by the normal feed delivery cost multiplied by the percent of feed value not consumed.
Veterinary and health. It is assumed that most of the veterinary and health cost occurs in the early part of the feeding period before pigs weigh 50 pounds. If pigs die before 50 pounds, the veterinary and health charge per head is reduced by 50% for the pigs that die. For death loss that occurs after 50 pounds, there is no assumed reduction in veterinary and health costs.
Marketing – transportation and checkoff. Mortalities decrease the marketing cost as these pigs are not sold. The projected marketing cost times the mortality rate is the cost reduction per head.
Additional expenses such as utilities, labor and facility charges are assumed not to change as mortality changes as previously discussed.
Example Budget Inputs
To illustrate the value of a one-percentage point improvement in mortality, consider the following assumptions.
Income related assumptions
$70 per cwt. carcass price marketing at 284 pounds live weight
$2.30 manure value per head
Expense related assumptions
$35 weaned pig price per head
$0.09 per pound of feed
2.7 pounds of feed per pound of gain (feed efficiency)
150 lbs. average weight of mortalities
$12 per ton feed processing and delivery cost
$4.50 veterinary and medical cost per head
$1.00 marketing cost per head
$13.99 other variable costs per head
$11.79 fixed cost per head
Results and analysis
Using the above inputs and assuming a 6% mortality rate results in a $6.37 per head profit. Changing the mortality rate to 5% increases profit by $1.04, to $7.32 per head.
The Pig Survivability Project – Wean-to-finish mortality economic modeling spreadsheet allows users to compare the economic impacts of different mortality rates using various price and production scenarios. The spreadsheet along with an information file is available on the Iowa State University Ag Decision Maker website at https://www.extension.iastate.edu/agdm/livestock/html/b1-78.html.
Table 1 shows the revenue, cost, and net income effect on a per head and per group basis for 6% mortality and 5% mortality compared to 0% mortality.
Table 2 summarizes the partial budget changes in revenue, cost, and net income due to the one percentage point change in mortality from 6% to 5%. Note that the net income per head change of $1.04 is the same as in the full budget.
In the example, the group size input is 2,400 head. Some mortality mitigation strategies may affect more than one group of pigs so the input on size of group should reflect the number of pigs impacted by the cost of implementing the mortality reduction strategy.
Sensitivity analyses allow for comparisons of net income per head impacts over a range of mortality rates and market hog prices, feed costs and feed efficiency. Using the example estimates, the results of three sensitivity analyses are shown in Table 3. As overall profitability increases the value of a change in mortality increases. Also, the impact of a market hog price, feed cost or feed efficiency change can be assessed along with the mortality rate change.
It is important to note that any cost of obtaining a one-percentage point improvement in mortality has not been accounted for. Rarely will both costs and benefits be cleanly observed. By knowing the benefit, as calculated here, one can back into indifference points to guide decision-making (Schulz, 2021). The net income change represents the economic opportunity of decreasing mortality. Assuming there would be some cost associated with decreasing mortality, the net income change represents the maximum amount that could be spent to achieve the mortality rate improvement and make the operation more profitable.
Summary
Mortality reduction can improve profitability in wean to finish production if the marginal income is greater than the marginal cost. Using a budget analysis explained in this fact sheet, and the Pig Survivability Project – Wean-to-finish mortality economic modeling spreadsheet, managers can more accurately project improved returns over a range of prices and production efficiencies. The projected improvement in gross income can be compared to estimated costs of mortality reduction strategies to provide a cost-benefit analysis.
References and Citations
Crooks, A.C., H.S. Hurd, D.A. Dargatz, and G.W. Hill. 1993. Economic cost of preweaning mortality: A report of the NAHMS national swine survey. J Swine Health and Prod. 1993;1(3): 15-21. https://www.aasv.org/shap/issues/v1n3/v1n3p15.pdf.
Dhuyvetter, K.C., G.T. Tonsor, M.D. Tokach, S.S. Dritz, and J. DeRouchey. Swine Wean-to-Finish Cost-Return Budget. Kansas State University Agricultural Experiment Station and Cooperative Extension Service, MF2757. April 2014. https://www.agmanager.info/sites/default/files/pdf/mf2757.pdf.
Holtkamp, D. Economics of Disease and Evaluating Swine Health Interventions in an Era of High Feed costs. George A. Young Swine Health and Management Conference. 2008. https://www.aasv.org/library/swineinfo/series_index.php?id=6#69
Holtkamp, D. and L. Schulz. Episode 10: The Economics Behind the Swine Industry. PigX Podcast. March 1, 2021. https://globalagnetwork.com/pigx/podcast/episode-10-the-economics-behind-the-swine-industry.
Schulz, L.L. Sensitivity Analysis of Net Returns to Mortality. Pre-Conference Seminar: Raising Pigs for Dummies (Keep them Alive). Proceedings of the 52nd Annual Meeting of the American Association of Swine Veterinarians. February 2021. https://www.aasv.org/library/swineinfo/series_index.php?id=12#146