It seems there’s no end to the decisions you have to make in pork production. Like it or not, you have chosen, inherited or stumbled into an industry where change is the featured word in most conversations, seminars and meetings today. People are constantly urging you to prepare for change, restructure, rebuild, remodel, repopulate, expand, network, contract and so on.
It is wise for each of you to take stock in your situation, assess the horizon as best you can, and make decisions that will set the stage for a rewarding future. Decisions of this sort are called strategic because you will live with them for a long time. Their significance grows over time
because you cannot go back and change them, and prior decisions usually restrict or enhance today’s options.
The first questions you need to ask yourself are fundamental:
What do I want to do?
What should I do?
What can I do?
What am I good at?
What are my resources?
What are my restrictions?
What are the best ways for me to utilize my resources?
Does any of this remind you of an earlier time in your life when people asked what you wanted to be when you grew up? It’s the same concept.
In reality you’ve already made the first decision that you want to participate in a modern global pork industry – or you wouldn’t be reading this magazine.
Full of opportunity
In addition to its incredible pace of change, the pork industry has been the most profitable sector in agriculture during the past 15 years. The ebbs and flows of supply, demand, expansion, trade and the economy point toward tight profit margins in the short term. But they also indicate an optimistic long-term future with untapped domestic demand and growing global trade.
There are many ways to participate, depending on your skills, assets and, most importantly, your desires. You have new choices to make. For example: Do you want to be diversified or specialized; independent or network with others; self-contained or a contract structure; an employer or employee; remain stable or grow; be low debt or highly leveraged; and so on.
You also have to be realistic. You may want a 2,400-sow unit but don’t have the assets to keep the leverage within an acceptable range. There are examples where a great idea is 100 percent funded by someone else, but normally you have to back your own plans with your own equity.
Don’t let that kill your dream. You may consider contracting with someone who needs the hogs produced from your unit and thus will help with leverage.
You may consider becoming a manager for someone else until you can swing your own venture. Check out today’s wages. Highly motivated, productive managers make more annual income than many farmers operating in the low-productivity ranges.
Of course real life isn’t as simple as the example above. For starters, past profitability is only a suggestion of future performance. You can improve future profitability by reducing costs, increasing asset turnover ratio and higher hog prices. Naturally, these can all go the wrong direction as well.
The question is how much control do you have over your situation? And do you have enough reserves to get through a temporary downturn. You cannot overcome a negative number on profit per pig (see No. 2 above) by producing more volume.
Detailed farm records can help you tell the difference between long-term productivity/profitability and short-term cycles or aberrations. Don’t make decisions on the latter. Five-year rolling
averages for a stable or moderately growing operation are sound indicators. The averages should come from your own records, not benchmarks, industry averages, your neighbor’s numbers or wishful thinking.
Larry Bitney from the University of Nebraska presents a logical way to calculate what size a pork operation needs to be to support a family. He uses asset turnover ratio as an indicator of efficiency and net farm income from operations ratio as an indicator of profitability. Of course, in the end these ratios are affected by the same costs and markets previously noted.
Using Nebraska averages and assumptions, $46.26-per-hundredweight live hogs, $2.35-per-bushel corn, 122 percent asset turnover ratio, 15 percent net income from operations, Bitney calculates a 162-sow, farrow-to-finish operation should produce a $40,000 annual income.
Again it is dangerous to assume that you’re average or above average without your own records to verify those assumptions.
What are the long-term prospects?
We’ve all heard the bold predictions:
“Only 40 pork production systems will control the U.S. industry within 10 years.”
“If you don’t have a packer contract, you will not have access to markets.”
“If you don’t have at least 2,000 sows, you cannot compete.”
“If you don’t have at least 10,000 sows, you cannot compete.”
“If you don’t have at least 40,000 sows, you cannot compete.”
“If you are not located in the Corn Belt, you cannot compete.”
“If you are located in the Corn Belt, you cannot compete.”
You don’t want to become famous for ignoring such possibilities or you’ll end up like the person who predicted that the Japanese auto industry would never compete globally.
You have to be careful that the previous concepts don’t become self-fulfilling prophesies simply because you believe them and give up. Truth is, nobody knows how things will unfold. And historically, predictions have been wrong more often than they’ve been right.
In any case, it pays to be flexible. We all know of highly profitable farms with 200 sows. There are many examples of successful farms with 2,000 sows. We also know of mega-farms that have had problems.
There are tradeoffs between economies of scale and “manageability” of smaller-sized operations. The key is to build what you want, designing for your own success. However, use technology that is standard for contractors so your assets aren’t too unique and can become a cog in a bigger wheel if needed in the future.
How big does an operation have to be to make a decent living?
1. Needed net income per year for my family (include some for savings)
2. Profit on my farm per pig
3. Divide line 1 by line 2 = number of pigs needed per year
Calculate this for different profitability levels.
Nuts and bolts of a strategic plan
Planning plays an important role in any business venture. It can be the difference between success and failure.
People often think strategic planning is only for big businesses, but it’s important for pork production operations of all sizes. You should plan carefully before investing your time and money.
People often have a good idea as to where they’re headed but have not formalized it in writing. If it’s in a file between your ears, it’s hard for others in the operation to buy into your goals.
Strategic planning is a way to match your enterprise’s strengths to available opportunities.
To begin, you need to understand the strengths and weaknesses of your farm and the business environment. You must develop a clear mission, goals and objectives for your enterprise. Keep in mind, you may not be able to objectively evaluate your farm’s strengths or weaknesses because you know it so intimately. Acquiring the necessary understanding often involves more work than expected, and many farms lack the production and financial records to do it well.
Define your enterprise
A successful business starts with a clear direction– a mission statement. It outlines such things as what you want to achieve and the steps required.
While your own mission may be to survive, make a profit, be your own boss or even be rich, you must determine your business’ purpose and specific objectives. You may choose to specialize in producing feeder pigs, finishing only or you may handle everything from breeding to market.
Those eager to push the envelope toward the future may consider coupling production with marketing to sell brand-name pork products. In any case, you have to think in terms of being in the food business vs. raising hogs.
Including your business philosophy in the mission statement helps develop a consistent business culture. When employees know the organization’s mission, they can conduct themselves in a manner consistent with your wishes.
Develop your enterprise strategy:
Would you prefer to build your business slowly from a solid base or are you a risk taker? Will you concentrate on high quality, low costs or both? How will you relate to neighbors, packers, suppliers and competitors? What type of community involvement do you plan for your business?
Consider your farm’s position in the pork industry and the broader business environment. Examples of shifting trends may include new competition, changing consumer tastes, economic downturns, high corn prices, packer access, technological developments and legislation
Changes in the business environment may force you to reallocate resources, or delay or drop some goals, or realign your operation, but flexibility can increase your competitive position.
Identify strengths and weaknesses
Once you’ve analyzed the external environment, the next step is to determine how your business fits in. You may choose to target a market that will pay for pigs of a certain type. You may see opportunities to network with other producers so each can specialize in a stage of production.
Flexibility is an advantage that small businesses often enjoy over large rivals. You may be able to respond more quickly to cost swings or changes in the market. Small pork businesses also can change production practices quickly.
You may view a competitor as having an insurmountable cost advantage from adopting a new technology. But your family or employees may have management skills and flexibility that give you an edge elsewhere.
Set enterprise goals and objectives
The owner, family members and key employees should set clear goals to guide the business toward its mission. It’s easier to get employee support if they’re involved in the planning.
A goal could be to become the most profitable midsized pork producer in the state within the constraints of your existing land base.
Accomplishing a goal requires establishing and achieving detailed objectives. An objective to the previous goal could be to build a new farrowing facility to increase total pigs produced.
A subsidiary objective to that may be to purchase genetically improved sows and have them bred in time to fill the new unit. Another objective could address expanding the staff to handle expected increased labor requirements.
Focus on what’s important
When you have a clear grasp of the competitors, customers, suppliers and prospects you face, and you combine that information with a realistic understanding of your strengths and weaknesses, you can develop a sound strategic plan.
Don’t get caught up in coffee shop comparisons or the latest fads ù focus on what you know is important to your plans and your goals.
Applying your strategy to your business
Your business plan is a succinct document that outlines your strategy in detail. This is the place for you to communicate why you’re in business, what you want to produce, and how you will market the products.
It allows you to showcase your management skills, facilities, employees and other assets. In addition, planning prevents you from making
decisions by the seat of your pants.
A well-written business plan provides broad parameters that you can use to assess your progress toward goals. And it helps you control future decisions. A business plan is almost always necessary to obtain financing.
Speaking of financing...
Financial statements are an important part of an agricultural business plan. Besides identifying what you intend to do, a business plan should reflect the business’ current financial position and the expected position relative to anticipated future management decisions.
For those of you already in business, this means including a current balance sheet, income statement, statement of cash flows and selected financial ratios.
For new businesses or businesses that require further investment, you should include pro forma information that projects the financial position once those funds are available. The owner needs to identify any funding requests and what will be done with the money.
Pro forma statements should include:
A balance sheet
An income statement
Cash flow projections
Selected financial ratios
A breakeven analysis
It speaks for itself
If you have written a detailed business plan, have a track record that proves you can do what you say, and are able to come up with approximately 40 percent of the equity, you typically won’t have trouble obtaining financing.
Less owner equity is allowed in some cases, especially if there’s an arrangement such as a contract with a reputable company that removes some marketing uncertainty.
A producer may want to embark on a great adventure but not risk the home farm. Rare is the investor who thinks little enough about his or her money to finance your dream if you have nothing on the line.
If the industry did have a lot of that occurring, you’d want to think seriously about whether it would be profitable for long. The current mix of equity and commitment balanced with investment and loan capital is probably about right for the industry to remain healthy.