"Don't Let Your Assets...,Well, Sit on Their Assets"

Agricultural production is kind of a strange bird compared to other business processes. In economic terms, one of the real challenges is something called “asset turnover”. Asset turnover is the time it takes to generate the value of all assets used in the production process through sales of finished products. Asset turnover is a key determinate of Return on Equity along with net income and level of leverage employed (see the Dupont Equation if you are a budding MBA).

If you think about it, crop producers purchase a $400,000 combine which they operate a few weeks a year and then it is a high-priced bird perch for the next 10 or so months. This is the killer of asset turnover in most biological production processes since many of them are not continuous.

Modern pig production is a little different in that it is a continuous production process, and the focus on “throughput” is a direct attempt to improve asset turnover. However, since the sow has a fixed gestation period and the growout cannot be appreciably shortened, this “fixity” produces challenges that abound in agriculture (think of a wine producer or fine whiskey producer and the “length of gestation” involved there in the aging process) but don’t always confront other production processes.

One of the key principles in production processes such as ours is that you do all that you can to make sure you don’t add to the natural fixity periods by waste, inattention or inefficiency. Hence, we measure non-productive sow days, wean-service intervals, farrowing intervals and days on feed etc.

Along with the natural lags we inherit honestly in agricultural processes, there are issues of variance in outcome from the ideal. Variance is the “spread” that develops around the targeted average that results in many different outcomes even when one is targeted as ideal. If you think about it, pigs are cast into the variance problem even before birth and many other factors, both natural (like seasonality) and management oriented like choice of feed, health status, choice of facilities etc. either add to or help constrain variance from ideal.

Since reducing variance has a very powerful impact on Return on Equity, I think it is safe to say, it is the next major competitive change coming in the swine industry as producers try to escape the commoditization problem which reduces rewards for improvements as they become “normal” for the industry instead of actually “improvements”. This happens when there is wide-spread adoption. It is not hard to show that in most cases, reductions in variance are the biggest single financial improvement that a pig production unit can effect. Therefore, let’s turn our attention to that for a while.

Think about this, even though every finished hog is worth well over $100 (so far), nowhere in the production process is that pig, as an individual, weighed, measured for quality or evaluated financially until it is finished and sold. That makes measuring and correcting variance a little challenging doesn't it? Oh well, we're up to challenges so let the discussion begin.