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How Chasing Return on Equity May Lower Return on Equity

    Reducing variation requires first an understanding of the source(s) of variation, the likelihood of mitigation strategies to successfully reduce the variation and the cost/benefit trade-off in source mitigation. As we have discussed, the typical farm record systems and the procedures which are considered practical to perform, work against developing the necessary data and anaylysis to gain a clear understanding of the return for variance reduction.

    However, one of the most powerful aspects of variance reduction strategies is that if they are successful, they favorably affect both revenue and cost simultaneously. This results in a double bang for the buck when considering the potential financial outcomes of variance reduction investments.

    Since little was understood about the role of production variance on net income; building systems, equipment systems, management systems, contract production systems and pig flow rules of thumb etc. have been put in place over the years causing inflexibility and making it difficult to deploy certain new strategies.

    For instance, contract production systems save equity and allow for greater expansion of the sow base since the capital of the grower forms a significant portion of the total investment required. Many growers elect to make this investment because the returns are generally very high to equity and the value of the manure has been increasing dramatically where it can be used as a commercial fertilizer substitute.

Don Tyler Biographical Sketch

Don Tyler grew up on a diversified family farm in Northwest Indiana and graduated from Purdue University in 1979. He and his family managed farms in Illinois for several years before returning to Indiana to become a partner in a grain and livestock operation in Clarks Hill.

J. Philip Lobo Biographical Sketch

Philip Lobo has worked in agriculture since 1993. He joined the Animal Agriculture Alliance, located in Arlington, VA, as Communications Director in January 2004. Prior to joining the Alliance, Lobo was Editor of Feed Management magazine, Editor of Feed E-news electronic newsletter and North American Editor of Feed International Magazine. Lobo manages all aspects of the Alliance’s communications and public affairs activities. In collaboration with other staff, he produces and edits all the Alliance’s publications. He develops relationships with key agriculture and consumer media representatives and cultivates a network of scientific and policy experts whom the media can call upon to develop stories.

Opportunity Revenue and the Cost of Intervention

Causes of variation in pig production are many and not well understood. One of the key issues arises from the spread in pig weights which begins through a kind of competitive process among the pigs beginning well before birth. Competition in the uterus and during lactation results in a sometimes widely spread distribution of potential in pigs by the time they reach weaning. Some common management procedures are implemented beginning at birth to attempt to reduce variation but their outcome is often marginal, while others, such as processing and castration introduce new challenges to subsets of pigs. Pigs of different weights require different environmental temperatures, feed types and other conditions, yet as variation increases, "average" conditions are provided which probably miss the ideal environment for all but a very small number of pigs.

Some producers are experimenting with simply euthanizing the smallest pigs either at weaning or prior to weaning. An arbitrary percentage is chosen, such as the smallest 3-5% as candidates for euthanizing. Recently published trials (Wolff, Lehe, Keffaber and Deen, "A Producer's Tool for Measuring Attrition", IPVS, 2006) suggest that the weight of the pig, relative to its cohort at both weaning and the end of nursery phase are sentinel indicators of eventual final quality with the weight at the end of the nursery phase a stronger predictor. The result was obtained with all other things held constant so it isn’t clear if targeted or more intensive individual interventions aimed at the smallest pigs at weaning and feeder pig stages would affect the outcome.

Measuring Variation is a Highly Variable Process...

Understanding variation in a pig production process is a data thing. In order to manage something or improve it, it must be measured. Measuring variation has not been a high priority in the first phase (if you will) of the modern pork industry, at least at the production level. Most record systems and the available technology to-date have focused on measuring and recording group averages. Kill sheets traditionally have provided more information about variation but until relatively recently, most producers have not had access to individual pig outcomes even from the packer (which is the only place in the vast majority of operations, where individual pigs are weighed and evaluated for quality). Typical kill sheets group pigs in ranges without giving individual animal weights and lean percents.