Economic Impacts of Increasing finishing Pig Space Allocation

This report is a summary of a larger project that analyzes the economic tradeoff between economic based pig space allocations and those based on growth performance. The most efficient economic allocation of space [1,2] is about six square feet of floor space per pig. Gonyou et al. [3] reported that the minimum space allotment that did not affect growth performance is approximately 8.7 sq ft per pig when using the formula A=0.215 x BW0.67 where area is in square feet, BW is in pounds and 0.215 is a constant k. Clearly, there is a conflict between economic and productivity based stocking densities at finishing. This analysis reports the financial impacts of changes in market weights, resulting impacts on packer payments and ripple effects on system wide pig flow from increased space allocation.

Objectives

• Establish a baseline of industry pig space allocation and finishing barn closeout practices.
• Develop a production driven financial simulation model of pig space allocation.
  • Create farrowing, nursery and finishing stages to analyze impacts on pig flow.
  • Incorporate illustrative packer matrices to analyze market timing and closeout impacts.
  • Include production performance measures to evaluate finishing growth impacts.
  • Simulate production impacts on cash flow and balance sheet models to evaluate financial impacts on a return on equity (ROE) basis.
• Construct scenarios of alternative strategies to manage increased space allocation.

Methods and Analysis

Survey of Pig Space
To establish a technical baseline for finished pig stocking practices and marketing practices in the U.S. swine industry, a survey of industry participants was conducted. Results of the survey show that the average confinement pig space allotment in the industry is 7.2 square feet per pig. This is between the optimal economic allocation of six sq ft per pig and the minimal allocation of 8.7 sq ft per pig to avoid productivity losses.

All pigs are marketed at the same time (dumped) in about 10 percent of confinement barns. For the other 90 percent, the heaviest hogs are sorted from the pen and marketed while the lighter pigs remain in the pen for a period of time to gain additional weight (topped).

Financial Model of Pig Space
The model has a production module which is based on a 2600 sow farrowing unit. From this basic input, nursery and finishing systems are created. Specified space allocations determine facility parameters as well as feed performance, mortality and growth. Pigs flow through the system and are marketed at weights dictated by stocking densities.

A marketing module accounts for the differences in marketing finished pigs as a result of changing pig space requirements. Since production is based on 2600 sows, the number of pigs flowing through the system does not necessarily change. In those situations, pigs must be marketed at lighter weights to maintain designated space allocations. This module incorporates representative packer payment grids which affect prices received for pigs.

The financial accounting module (assets, liabilities, costs and returns) assigns economic values to the production process. These combined modules provide economic outcomes of profit, asset utilization and return on equity to evaluate potential impacts of pig space.

Scenarios
Two basic alternatives were examined to meet pig space allocation requirements as indicated by the headings in Table 1.

1. Maintain the same number of pigs in the system, but market some or all pigs at lighter weights.
2. Reduce the initial stocking rates of the finishing facility by either reducing sows in the herd, marketing weaner or feeder pigs before they enter finishing, or building more finishing barns to accommodate the pigs with greater space.

Both basic scenarios are simulated for large pen barns and small pen barns and all simulations are also completed for two different packer grids. The grid defined as ‘wider’ allows for slightly more variation in weights, both heavier and lighter. The grid defined as ‘narrower’ allows for less variation in weights and prefers a slightly lighter hog on average.

Simulations and Results
Simulating the scenarios using Microsoft Excel provides the following key results included in Table 1;

1. Increasing finishing pig space allocation beyond current industry practices results in a negative impact on return on equity (ROE) and profits for all scenarios except adding finishing barns using the narrower grid with large pens.
2. Marketing the fewest possible pigs at lighter market weights (one instead of two or four) results in lowest loss of ROE and profits given increases in space allocation. This is because fewer pigs are marketed at the lightest weights which have the greatest discounts in packer payment grids.
3. Selling weaned pigs prior to placement in finishing is preferred to all scenarios of marketing lighter pigs when marketings are managed to meet space requirements.
4. Reducing the breeding herd is the worst alternative in all cases. This is because the fixed cost per pig increases dramatically throughout the system.
5. The best alternative is to build finishing barns to accommodate existing pig flows and requirements for increased pig space. This is due to a combination of improved growth performance, avoidance of packer discounts for lighter pigs and the ability to amortize costs of investment in finishing over time.

Table 1. System-wide Financial Impacts of Alternative Space Allocation

Summary

Space allocation has production performance, pig flow, capital utilization and market price impacts. Increases in finishing pig space allocation beyond current industry practices result in reductions in financial performance. The best possible mitigation strategy for multi-site confinement production systems is to build finishing space to provide greater space per pig, although this still has negative financial impacts. The specific levels of impacts are dependent on prices, productivity and other financial parameters in the model. A more complete report and a complete spreadsheet with the capability to adjust parameters are available from the authors.

In a policy context, results show that the adoption of space restrictions should be carefully considered in concert with any potential economic benefits which might occur, namely consumer willingness to pay for pigs raised in larger spaced facilities. Further, the best financial mitigation strategy (building more finishing barns), may be difficult to implement given existing siting and permitting restrictions. Therefore, increases in space allocation requirements will likely negatively impact the economic competitiveness of the U.S. pork industry unless competitors must do the same.

References

[1] Edwards, SA, et al. Effect of floor area allowance on performance of growing pigs kept on fully slatted floors. An. Prod. 1988;46:453-459.

[3] Gonyou, HW, Deen, J, McGlone, JJ, Sundberg, PL, Brumm, M, Spoolder, H, Kliebenstein, J, Buhr, B, and Johnson, AK. Developing a model to determine floor space requirements for pigs. J. Anim. Sci. 2004;82: pp