2007 COMPARITIVE COST OF PRODUCTION BENCHMARKS RELEASED AT PORK$HOP.08

On June 4^th Latta Harris, Hanon & Penningroth, L.L.P. Certified Public Accounts and Consultants of Tipton and Washington, Iowa presented their annual report of the 2007 comparative cost of production and financial benchmarks for the swine industry.  This was the fifth year that participating pork producing clients of Latta Harris allowed their financial information to be presented in a comparative per unit summarized report.  Latta Harris Principal, Mark Penningroth, CPA reported the underlying database for the report which now represents 48 herds with a total annual production exceeding 2.7 million pigs.

The conference was held at the DeWaay Capital Management Office in Clive, Iowa.  Conference attendees were pork producers, pork industry economists, bankers and academics.  The financial data was presented in report format and calculated the following; the cost to produce a weaned pig, the cost to add a hundredweight of gain and the whole herd cost per pound sold.  Latta Harris Consultant, John McNutt, MBA and Past President of the National Pork Producer Council described how the methodology and logic used to calculate and display the cost information was developed by Latta Harris.  The foundation of which was based on procedures developed by both the Farm Financial Standards Task Force and the National Pork Producers Production and Financial Standards for the Pork Industry.

In addition to the comparative data from farms located across the Midwest, Penningroth and McNutt calculated estimated target benchmarks for both an average level of performance (50th percentile) as well as a target to be in the top 90th percentile of the industry.  McNutt stated "that to be in the 90th percentile a herd would have a cost of production that was lower than 90 percent of the other herds in the nation".

The Results for 2007:

Cost to:	Latta Harris Producer Average	50th Percentile	90th Percentile
Produce a Weaned Pig	$ 32.00	$ 35.99	$ 27.14
Add a cwt of Gain (w-f)	$ 37.07	$ 42.31	$ 35.40
Sell a cwt of Pork	$ 48.69	$ 54.15	$ 44.04

Penningroth noted "that on a whole herd basis for 2007 Latta Harris estimated that overall costs were up by 16 percent for a 90th percentile herd and 24 percent for an average herd.  The spread between being an average and a low-cost producer is expanding and difficult times like the industry currently is experiencing only aggravates this difference."  McNutt told the conference that they estimate that Latta Harris's client average was about the 75th percentile, but individual firms within the comparative database experience substantial different levels of profit and loss in 2007, the difference being as much as $25 per head sold.

Latta Harris also reported on estimated benchmarks for 2008, these estimates were based on an average corn price of $5.70 a bushel and soybean meal for $358 per ton.  Based on these feed prices cost are estimated to go up another 26 percent in 2008.

Estimated for 2008:

Estimated Cost to	50th Percentile	90th Percentile
Produce a Weaned Pig	$ 41.71	$ 30.60
Add a cwt of Gain (w-f)	$ 54.63	$ 46.26
Sell a cwt of Pork	$ 68.08	$ 56.10

McNutt indicated that they estimated the breakeven carcass price needed to breakeven at a 74 percent yield will be $92.00 for an average producer and $75.81 for the 90th percentile of the industry.  For 2008 he estimated that the spread between being an average and a low-cost producer will grow to more the $32.00 per head sold.  This is the time to stay focused on all aspects of your business, including risk management and cost control.  It will be the difference between who is still in business when all of this turns around.

The emphasis on cost benchmarks and risk management drew a record attendance to the 2008 PORK$HOP at the DeWaay Commerce Park in Clive, Iowa
John McNutt and Mark Penningroth explain the Latta, Harris 2007 Pork Cost of Production Benchmarks and industry projections for 2008.
Economist Steve Meyer quantifies the challenges for pork producers in the coming year.	Consultant Moe Russell summarizes risk-management strategies.

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The road to the top isn't always smooth or easy, and it's prudent to bring along an experienced guide and travel with others headed toward the same goal.  That's the theme of the 2008 FBS User Conference, conveniently located at the intersections of Interstates 80 and 74 and the Mississippi River in Moline, Illinois.  This year we'll cover a lot of ground, from training on FBS's milestone upgrade—V8—to dozens of shortcuts, technologies and practices to transport you quickly and efficiently to where you need to go.

We'll even slow the pace down for a relaxing evening of fine food and family entertainment at one of the midwest's premier dinner theaters.

So take the high road to the picturesque Stony Creek Inn, August 20^th and 21^st.  Accommodations are limited, so act now. Click on the links for a downloadable brochure or the registration form.

Stretch your understanding and capabilities through relevant classes and breakout sessions.
Experience and train on cutting-edge hardware and software technologies.
Dine, relax and network in an historic, professional dinner theater.

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"We are asking people to give us 3-, 6-, 9- and 12-month cash flow needs, with updates on a monthly basis.  We look at budget-to-actual (reports) to see if they are on target."

                                                                                                Mark Greenwood
                                                                                                Financial Services Executive
                                                                                                AgStar Financial Services
                                                                                                PORK$HOP.07 speaker
                                                                                                Quoted from the June 15, 2008
                                                                                                National Hog Farmer

Last month we laid out the challenges and goals of budgeting and monitoring the dynamic flow of animals a modern livestock operation, and covered the process of projecting the flow of weaned pigs, replacements and culls in swine breeding operation.

This month we'll be demonstrating how the Smart Feeder Planning module combined with LifeCycle Budget meets the cash flow requirements for lenders like Greenwood.

Production Plan

Center Setup For each feeding center (site) and calendar year, define the planning period (normally 7 days), beginning inventory quantity and weight and select the rate of gain table and the accounts, centers and divisions (to tie the plan to the LifeCycle cash flow).  Year starting dates and weeks in the year will correspond to the breeding stock supplier's standardized weekly calendar.

Rate of Gain Table The rate of gain table selected will determine how fast the animals will gain weight, how much feed of each ration (phase) they will eat, and when those rations will be changed.

Since a group of animals never grow at the same rate, the rate of gain table can also predict the sales spread (the time period over which a group will be closed out).

Build from Actual If Smart Feeder and TransAction Plus data files exist for the past year and/or current year, we can populate the plan with actual data (and project forward using the rate of gain table assumptions).  To activate, click on a cell in the current week and press the Build key.  All columns to the left of the current week will be replaced by actual data.

Project In order to continue the animal/feed flow planning process through the current year (and beyond), enter moved in, animal purchase and death loss assumptions and press the Project button.  All cells to the right of the selected column will be updated based on the rate of gain table values.  In the example above, inventories, sales and feed consumption from three concurrent groups are being projected.

Global Sales Projections To expedite sales projections for a number of feeding sites, use the global sales market price projection feature to adjust sales prices by week.

Animal Flow Chart By pressing and copying the planning screen to Excel, it's easy to create a visual animal flow chart.  A byproduct of the integrated planning process.

Recap So far, planning data have been recorded and reported by week.  Use the Recap function to report/export by month to correspond to our cash flow budget.  This report also serves as the supporting schedule for animal purchases and sales in the LifeCycle Budget, accessed by right-clicking on appropriate cell.  Note that feed quantity and costs have been converted from rations to ingredients-handy for projecting corn and soybean meal requirements.

So far we've created animal and feed flow projections from actual data and/or rate of gain tables.  We've modified animal purchase and sales prices to match seasonal expectations.  However, feed costs are still based on the standard budget value associated with each ingredient—which may be close enough unless we expect feed costs to change during the planning period.  In that case, we'll use the Edit Feed Requirements function in the LifeCycle Budget.

Adjusting Feed Ingredient Prices This schedule is built automatically from the Smart Feeder Planning database, with the default ingredient prices equaling the standard ingredient budget prices and projected purchases summarized by month/center/account.  To adjust expected ingredient prices simply edit records for the appropriate month/ingredient.

Budget-to-Actual Comparison According to Greenwood and other financial experts, a budget needs to be monitored on a regular basis to determine is it is on target.  That function is provided by the TransAction Plus Account Summary Period-LCB Variance option.  Note that variance between budget and actual can be expressed not only in dollars, but also in quantities and unit prices—explaining with much more clarity how observed performance differs from expected performance.

Next month we'll show how to make adjustments to indirect costs.

Note:  We'll be providing in-depth training on LifeCycle Budget at the FBS User Conference.

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©2008 FBS Systems, Inc.