Recent developments in pig production : size efficiency relationships in pig production.

Abstract

PIG PRODUCTION SYMPOSIUM II. SIZE EFFICIENCY RELATIONSHIPS IN PIG PRODUCTION J. VAN HAERINGEN* I. INTRODUCTION In recent years, a trend towards an increase in the number of pigs ing has emerged in the industry. Generally, the total number of pigs has with an accompanying decrease in the number of holdings carrying statistics in Table 1 from selected countries illustrate that this trend is dent abroad. per holdincreased pigs. The also evi- Although the size of the average pig enterprise has increased substantially, it would be incorrect to attribute this solely to possible economies of size. Other factors contributing to the growth in the average size of pig producing units have been: (a) Decreasing profit margins per pig. To maintain total farm income, a larger number of pigs has to be produced. (b) Pig production has become relatively more profitable than other farm activities, e.g. on the cream producing dairy farms. (c) Changes in technology, especially in building design and manure disposal, have made it possible for the farmer to keep more pigs with the same amount of labour. (d) The practice of keeping pigs to provide meat for the farm family or to act as garbage disposal units is declining. II. ECONOMICS OF SCALE Economic theory distinguishes between pure scale relationships where all factors of production are changed in the same proportion, and size efficiency relationships where the change in total cost per unit of output results from changes in the proportion of the various inputs employed. In reality, pure scale relationships seldom occur and virtually every emperical study examining the relationship between average costs and level of production allows for changes in :R Department of Primary Industries, Brisbane, Queensland. 182 TABLE 1 the relative proportion of factors of production. In contrast to pure scale relationship, size efficiency relationships are usually referred to as economies of size; these can be divided into internal and external economies. External economies are beyond the control of the individual farmer, but may arise as a result of the growth of a particular industry in a certain locality. For instance, a certain minimum number of pigs has to be available before processing facilities or a feed industry can be established. Internal economies may be subdivided into pecuniary and technical economies. Technical economies are concerned with physical relationships or technical efficiency such as the number of litters per sow, food conversion ratios, disease incidence and grading percentages. Pecuniary economies to scale include costs of inputs (mainly feed in the case of pigs), selling price of product, cost of capital equipment and risk. III. EMPIRICAL INVESTIGATIONS *The question of the economies of size arising from an increase in the size of piggeries has been the subject of many investigations. Unfortunately, little information is available from Australian studies and it is necessary to turn to overseas findings. (a) United States Bauman et al. (1961), in analyzing 118 pig enterprises in Indiana, U.S.A., conclude that unit cost of pig production decreased significantly only up to a moderate enterprise size. There was little evidence that costs continued to decline as enterprises passed the 45 sow mark. Similar results are reported from Georgia, where Amick (1963) found that economies were associated with increased size of enterprise up to a 40 sow herd. Dirks and Fienup (1965) conclude from a limited survey in Minnesota, Iowa and Missouri that slight increases in production costs occurred once the number of sows per farm exceeded 50. They also found that, as units became larger, production costs tended to become more uniform. At lower levels of output, more variation existed in the costs, the degree of mechanization and managerial 183 ability. As could be expected, the volume of output per man increased as farms became more mechanised, but the capital costs in large units tended to raise production costs per pig. Blosser and OIDoster (1967) also found that production costs of pigs in Ohio did not decline significantly after the size of herd reached 34 sows, but many farmers kept a greater number of sows to obtain an increase in farm income from the larger volume of business. Large herds reduced the cost of feeding pigs to slaughter weight more than they reduced the cost of producing weaners. In this study, herd sizes ranged from 14 to 145 sows. (b) Canada I-Iackett and Reddon (1967) in Alberta conclude that the net returns to labour and management per pig are similar on both small and-large enteprises, but the large ones had greater net earnings because of their greater volume of production. Productivity of breeding stock and labour efficiency were better on the large than on the small enterprises. Veterinary and medicine charges per pig were much higher on farms producing over 500 pigs per annum than on those producing fewer pigs. Herd sizes ranged from 6 to 70 sows. After a five year study of 100 Ontaria farms ranging in size from 3 to 120 sows, Stephens (1966) emphasizes that size of business exaggerated the effect of other factors whether good or bad. In some cases, where increases in the size of enterprises occurred, there was a marked tendency to lose efficiency in other factors. In a study examing the cost structure of commercial pig farming in South Africa, Van Zyl (1968) found that the cost per pound weaner as well as the cost per pound carcass weight dropped with an increase in the size of the enterprise. The reduction in cost was very-small after herd sizes exceeded fifty sows. (d) United Kingdom (c) South Africa Thornton (1963) in the United Kingdom compares breeding herds of more than 60 sows with herds of less than 20 sows and reports that large breeding herds are not, on the whole, less efficient than small herds. The average number of pigs to survive per sow per annum was 15.3 for the large and 14.3 for the smaller herds. Juckes (1967) states that there is no evidence that efficiency standards such as conversion ratios, farrowing index and litter size are linked with size of enterprise. He points out that the general increase in size occurring in the UK need not imply economies of size, but notes that unless there are diseconomies of size there should be no limit to the size of herd. Possible diseconomies of size are associated with the reduction of managerial efficiency and the increase in disease risk. He found few indications of advantages to large pig herds in relation to capital costs, selling price and genetic improvements. The cost of feed depended largely on the source from which it was obtained. IV. THE INTERPRETATION OF-RESULTS While these findings in other countries are of considerable interest, the application of any conclusions to the Australian pig industry must take into account varying patterns of operations. The type of pig enterprise examined in these studies 184 may not have its comparable counterpart in this country. Climatic conditions, source of feed and the conditions with regard to markets and processing facilities may be, and generally are, quite different. In addition, the date of the analysis is important, particularly in view of the technological advances taking place and possible changes in the price structure. Variations of this nature also account for differences in research findings. However, Madden (1967) comes to the conclusion that not all of the variation amongst different studies is 'real.' In some cases, the variation is methodological due to differences in assumptions and procedure. The costing of managerial ability, the treatment of farm grown fodder, the valuation of surplus farm labour and the costing of capital-items comes into this category. Real and methodological variations are exemplified in Table 2. V. VERY LARGE PIG ENTERPRISES Apart from the trend towards an increase in the size of the average pig producing unit, there are also developments towards very large specialised piggeries (300 to 2,000 sows). While this development is still in its infancy, considerable speculation is already arising as to whether this will lead to a factory type approach to pig raising as happened in the broiler industry. No studies dealing with the economies of these large pig enterprises are available in the literature. All published material to date is concerned with size-efficiency relationships of piggeries developed under conventional systems of managements. The possible economies and diseconomies to be derived from a very large specialist pig enterprise will be discussed briefly in relation to the factors which markedly affect profitability in a pig enterprise. Feed costs comprise the largest cost item in pig production. Evidence from Queensland suggests this to be about 70 per cent of the value of gross output (Todd 1968). The large producer can have the advantage of lower feed costs TABLE 2 (a) Price of Feed 185 through b volume discounts and the use of farm mixing facilities. However, by utilising bulk storage and the opportune purchase of his feed requirements, the medium producer can overcome this disadvantage. Juckes (1967) considers that in the UK, with the machinery now available, it is feasible to run a mill and mix unit for 40 sows. This number could be even lower, especially if the unit were also used for other classes of stock. The cost of feed would, therefore, appear to be more a function of managerial ability and the role that the pig enterprise plays within the whole farm structure than of enterprise size. Feed costs, - generally, will be lowest when the pig enterprise is vertically integrated with grain production. In this instance, the large specialist producer would be at a disadvantage unless he were also a large grain producer .or connected with the feed processing industry. Labour costs comprise only a small part of production costs and depend on the degree of mechanisation and method of housing. Davis and Van Arsdall (1960) estimate that the number of litters which can be produced annually per one-man equivalent can be increased from 90 with low mechanisation and poor work methods to a potential of 215 with maximum mechanisation and efficient work methods (Table 3). The sideline piggery can have low labour cost because the opportunity cost of labour is often very low. On the other hand, it is possible to reduce labour costs in the large unit through specialisation. Any cost savings thus obtained, however, are partly offset by the necessity to employ supervisory staff. Availability of labour often puts a ceiling on the number of pigs carried on the family farm. This is often of more importance in substituting capital for labour than are cost considerations. TABLE 3 (b) Labour 186 Labour costs are also dependent to a large extent on the quality of management. The ability to employ suitable labour, to supervise and to co-ordinate labour has a marked bearing on the total labour requirements. Feed conversion ratios, carcass quality and litter size greatly affect profitability. The first two factors are influenced by hereditary character&tics and feeding practices, the efficiency of which need not be related to size. The large unit may have the benefit of more specialist knowledge but, at present, advice on the most economical rations is freely available to the smaller unit through the extension services. (Todd 1968; Harrison and Todd 1968). Opinions vary regarding the minimum herd size at which an effective breeding programme can be instituted. Fredeen (1966) considers a herd of four to six boars with a minimum of 60 sows would be necessary. Juckes (1967) states that many geneticists would recommend 300 to 500 sows. Once the minimum number of breeding stock is met, the results of an improvement programme depend on the skill of the owner or other staff. The large enterprise may again have the advantage because of the employment of specialist personnel. Information on the success of breeding programmes pertaining to different herd sizes is not available. Developments overseas, which tend to strengthen the position of the smaller and medium size producer, are the establishment of co-operative breeding societies in the UK; a weaner pig co-operative in Nebraska which intends to produce 12,000 pigs per year ('Pig Farmer,' December 1968, p. 413); the increasing use of artificial insemination in the Netherlands where, in 1966, 14 per cent of all SOWS were mated by A.I.; and the supply of hybrid breeding stock by a British meat processing firm to its contract growers (Friedlander 1966). The risk of disease incidence has long been considered a barrier to the development of large piggery units. Juckes (1967) found that there were some indications in the UK that disease risks are higher in larger herds but concluded that as disease control is improved, these risks may be overcome. This will particularly apply if the disease free status of herds developed through the production of minimal disease (MD) pigs by hysterectomy can be maintained. However, Penny (1967) states that disease breakdowns in virus free and MD herds have been common, and that from experience in the USA, three to four years might be the average disease-free period. Results in Australia so far have been promising. (d) Disease (c) Performance and Genetic Improvement No actual data are available regarding disease control costs in very large piggeries. Though these costs may well be higher, this need not necessarily imply higher disease incidence. Better management may spend more on prevention, resulting in improved growth rates. The very large units are likely to have more specialised knowledge available for diagnosis, prevention and treatment. (e) Management As the size of the pig enterprise increases, the demands on entrepreneurship, supervision and co-ordination become greater. Consequently, the cost of employing people with adequate skills in these functions of management will become higher. Dirks and Fienup (1965) in a budgeting study of a 10,000 pig enterprise, conclude that the cost of the management required to meet all problems associated 187 with large scale pig production could absorb all of the potential profit margin. Kadlec and Morris (1966) state that there are few operations in the U.S. producing 10,000 pigs per annum and that the ones that survive are based upon a small group of exceptional pig managers. However, they conclude also that this barrier could be overcome at any time. It would appear, therefore, that both the paucity of good managers and the present state cf technology effectively limit the number of very large specialist pig enterprises. Forms of vertical integration such as contract fattening and supply of breeding stock by meat processing firms could reduce the demand on managerial skills. (f) Capitd Investment The costs associated with capital investment are mainly dependent on the cost of buildings, the rate of interest and depreciation charges. It is possible that large piggeries can be built more cheaply per sow unit initially because of the volume of construction carried out at the one time. However, the smaller producer is frequently in a position to utilise cheaper labour and building materials. Also, because of the time involved in building up the breeding herd, the construction programme of large enterprises would still have to be in stages. Assuming a difference in construction costs of $100 per sow, 5 per cent depreciation and a 6 per cent interest rate, the extra cost per sow would amount to $8 per annum or approximately $0.50 per pig produced. There is a strong argument in favour of using a higher rate of depreciation on buildings of a large specialised pig producer on the grounds that the possibilities of alternative usages for these buildings are fewer than for buildings on a mixed farm. However, once the buildings have been constructed, the interest and depreciation charges adopted and included in the costs are of purely historical interest - they are of importance only in calculating profitability budgets before the venture is commenced. The opinion is sometimes expressed that the large nig enterprises may ultimately force the smaller existing units out of business be&use of lower production costs. However, a producer will produce as long as he covers his direct costs and receives a higher return for his labour than can be obtained elsewhere. To the farmer, non-cash costs such as interest as an opnortunity cost, and depreciation are less important than his bank loan repayments. The producer who has full equity in his buildings is not concerned with interest and depreciation charges, nor is the mixed farmer whose loan repayments relate to the whole of his property. It is the specialist pig producer with large financial commitments to meet who cannot continue to produce at the level where direct costs (including labour) equal returns. The implication is that unless the economies associated with large units are greater than the annual cost of providing these units, the trend towards large scale pig production will be slow. VI. DISCUSSION It would appear from overseas investigations that costs of producing pig meats are not markedly affected if herd sizes are increased to 150 to 200 sows. However, while labour is generally included in the cost items, management is not. This is primarily because management and labour are not separate functions on the family farm. Data on the financial performance of very large pig enterprises are virtually unavailable, but it is suggested that managerial skill is the main determinant in the success or failure of such enterprises. The size of the owner-operated pig enterprises depends not only on the cost per pig produced, but also on the owner's preferences - to maximise his income subject to his restraints of leisure and risk. When ownership (capital), management and labour are separated, more emphasis will be placed on the return to capital. The enterprise will be expanded until more attractive alternative investment opportunities can be found. Future developments are governed not only by the ability of the large specialist producer to decrease production costs to well below those of the conventional pig farmer, but also on the alternative return to labour available to the small farmer. Although production techniques and market conditions are subject to rapid change, the ability of the large specialist producer to increase profits substantially on a per unit basis is still in doubt. The structure of farming in general is also changing, and there is a move towards larger farms and increased specialisation. This in itself will reduce the number of small sideline piggeries based on the utilisation of surplus family labour. Finally, developments in the feed and meat processing industries will play an important role in shaping the pig industry. Will these interests move towards complete vertical integration with their own production facilities, or will they prefer to deal with a large number of growers? Is the average Australian pig producer sufficiently entrenched in the industry to wish to continue raising pigs as a farm activity in the face of lower profit margins? If so, is he prepared to adapt to changing methods of pig raising and industry organisation? Answers to these questions will provide a clearer indication of the direction in which the Australian pig industry is likely to move. VII. REFERENCES AMICK, R. J. (1963). Tech. Bull. Ga agric. Exp. Stn. N.S. 31. ( 1968) 'Verslag over De Landbouw in Nederland over 1966.' (Ministry of Agriculture and Fisheries: The Hague.) B AUMAN, R. H., E ISGRUBER , L. M., P ARTENHEIMER , R. E., and POWLEN, I?. A. ( 1961). Tech. Bull. La agric. Exp. Stn No. 699. B ISPERINK, H. J. (1967). Landbottrv Voorlichting. 24: 294. B LOSSER, R. H., and D OSTER , D. H. (1967). Bull. Ohio agric. Res. and Dev. Center. No. 1001. D AVIS, V. W., and V AN ARSDALL, R. N. (1960). Agric. Engang, St. Joseph, Mich. 41: 622. D IRKS, H. J., and F IENUP , D. F. ( 1965). 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