BREEDING HERD REPLACEMENT FEMALE EVALUATOR

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Curt Lacy, Ken Stalder, Tim Cross and Glenn Conatser
UNIVERSITY OF TENNESSEE AGRICULTURAL EXTENSION SERVICE

Situation
     Commercial swine production continues to become more specialized. Many producers have made the decision to purchase rather than raise replacement breeding herd animals within their commercial herd. Typically, the commercial swine producer will incur more out of pocket expense when purchasing replacement gilts compared to raising his or her own replacements. However, purchasing replacement gilts allows the commercial producer to avoid problems such as identifying pigs from litters bred to save replacements female through the production system, marketing the males from litters bred for replacement gilt production, maintaining boars from several different lines or breeds, etc. When swine producers purchase replacement - breeding animals, the mating system is dramatically simplified. Simplification of the mating system is particularly important as swine operations get larger and more hired labor is utilized. Additionally, seedstock suppliers have developed specialized terminal sire lines and maternal lines that excel in the production of lean, high quality meat and large number and weight of pigs per litter, respectively.

     During the last several years, the cull rate of breeding females has hovered near 50 percent according to several commercial record - keeping organizations (PigCHAMP, 1998; Pigtales, 1998). Reproductive problems (failure to cycle in a timely manner, did not conceive, did not farrow, etc.) represent the largest reason for culling sows from the breeding herd of commercial swine operations. Other reasons for culling may include poor performance, soundness problems, old age, etc (Brake, 1986; Dial and Koketsu, 1996). Increased culling, regardless of the reason, results in increased replacements rates and the need for larger gilt pools and thus, the purchase of more breeding gilts. In addition to the initial cost of purchasing replacement breeding herd females, a producer will incur further expenses associated with developing replacement gilts in isolation and acclimation (feed, housing, vaccine, non-breeders, etc.).

     Swine producers will face different challenges when purchasing replacement - breeding animals. There is a disease risk, however small or large, when animals are introduced into the breeding herd. Reducing the number of animals and the frequency of animal introduction can reduce the risk of introducing a disease not currently present in a swine operation. Producers should locate a seedstock supplier with a similar herd health status in an attempt to avoid introducing diseases not currently present in his/her herd. Reduced sow longevity (i.e. parity of sow at culling) results in fewer litters in which a sow has an opportunity to be sufficiently productive in order for her purchase to be profitable. Because of the cost of replacement females and short herd life, commercial swine producers need a tool to economically evaluate their replacement breeding herd female decisions.

Capital Budgeting
      In economic terms, a swine producer faces a capital budgeting decision when he/she considers the purchase of breeding herd replacement females (or any other depreciable asset). Capital budgeting for gilts takes into consideration the number of periods (parities) a gilt will be in the herd and the initial cost of the gilt followed by periods of expenses and income. Tax implications are generally ignored (Polson, 1977). This analysis is based on discounted cash flows, which calculates Net Present Value (NPV) and the Internal Rate of Return (IRR).

     Information that a producer will need when making capital budgeting decisions concerning the purchase of replacement gilts include:

1. The initial cost of the gilt
2. Additional gilt development costs (feed, veterinary, labor, etc.)
3. The expected productivity of the gilt (pigs per litter, litters per year, etc.)
4. The expected costs of production for the gilts' off-spring (feed, veterinary, facilities, labor, etc.)
5. The length of time the gilt remain in the breeding herd (parities)
6. The discount rate to be charged (interest or opportunity cost of capital)
7. The salvage value (cull value) of the sow when she is culled Included in the above information is the price of the gilt's offspring (price of hogs or feeder pigs, depending on the production scenario) plus any carcass bonuses that can be attributed to the gilt's genetic superiority.

Net Present Value
     Net Present Value (NPV) analysis is the process of taking an investment today, projecting the future net income from this investment, and putting these future earnings into present-day dollars. The reason for putting future dollars in present-day value is because one dollar today is worth more than one dollar tomorrow. This concept is known as discounting.

     NPV IS the amount of money an investment is worth in today's dollars. NPV takes into account the amount of the investment, the length of the investment, how long it takes the investment to return a profit, and the cost of money (interest and risk). Put another way, NPV is the amount of money you would pay today for a future amount (always some fraction smaller than one).

     Pork producers can use NPV analysis when making purchasing decisions or when evaluating replacement breeding herd animals from different sources whose initial cost varies. Additionally, NPV analysis allows producers to compare gilts with different productivity levels, length of service, feed conversions, and purchase prices to determine which is the most profitable for their operation.

     Net Present Values greater than zero indicate that an investment will be profitable when all of the above factors are considered. A NPV of less than zero indicate that an investment will not be profitable when all factors are considered. When several alternative investments are considered, the alternative with the highest NPV (greater than zero) is the most profitable.

    Internal Rate of Return The Internal Rate of Return (IRR) is the discount rate (or interest rate or rate of inflation) that will cause an investment to have an NPV equal to zero. Simply stated, the higher the IRR, the more profitable an investment is.

Example
     Suppose a farrow-to-finish producer can buy gilts from two different suppliers. The information required from the two suppliers in order to conduct a NPV analysis is shown in Table 1.

Table 1. Comparative example using Net Present Value (NPV) analysis to evaluate the purchase of replacement breeding - herd females that differ in purchase price.

     In this scenario, the gilts from Supplier A have a higher NPV of $32.29 ($232.94 - $200.65). Therefore, the producer would improve his/her bottom line profitability when replacement females are purchased from Supplier A. Additionally, a producer will realize a higher IRR if he/she makes a decision to purchase gilts from Supplier A rather than Suppler B. Higher IRR indicates that a producer who invests in a replacement female from Supplier A will receive a higher return on his/her money compared to investing in a replacement female from Supplier B.

     Because the formulas for NPV and IRR are fairly complex and tedious, very few, if any producers would take the time to perform this type of analysis. With those considerations in mind, the Swine Replacement Evaluator was developed.

Swine Replacement Evaluator
      The gilt replacement spreadsheet is divided into several worksheets that are linked. Worksheets are individual pages within the spreadsheet file. The spreadsheet is designed for a producer to enter production and financial data specific for his/her operation. Net Present Value (NPV) and Internal Rate of Return (IRR) are calculated based on the data specific for individual producers' operation.

Operation of the Swine Replacement Evaluator
      Data Entry- An example data entry screen is given below for gilt costing $125. Items that are to be entered should show up as bold face in blue color.

    Information a producer will need to input input
     1. Cost of a gilt
     2. Expected production from this gilt
          2.1. Expected pigs born live
          2.2. Expected birth-weaning death loss
          2.3. Expected weaning-nursery death loss
          2.4. Expected nursery-finisher death loss
      3. Expected parity at culling
      4. An anticipated discount (interest) rate. If no borrowed money is used,           then an opportunity interest rate should be used. This rate would reflect           what a producer would expect to receive should he/she invest his money           elsewhere.
      5. Other operating expenses (veterinary costs, utilities, repairs, etc.)
      6. Fixed expenses
           6.1. Building cost/value
           6.2. Amount of equity in the swine operation
           6.3. Interest rate
           6.4. Principal and interest payments (worksheet will calculate these)

     Specialized spreadsheets for farrow - to - wean and farrow - to - finish swine producers have been developed to determine the length of time a sow must remain in the herd to reach a positive NPV for each type of operation. The two spreadsheets operate identically, the only difference is how you define your operation. If your operation is not a farrow - to - wean or farrow - to - finish type (you may have a combination type of operation or a you may be a feeder pig produer), use the farrow - to - finish spreadsheet and enter only the information pertinent for your operation.

     Feed Information- An example screen from the feed information worksheet is shown below.

     Producers should enter the expected total feed intake for each stage of production for pigs destined for slaughter and breeding herd females along with an expected cost per ton for each diet. If any levels of production are unnecessary, a producer can either enter a zero for price/ton or amount of feed consumed. Sow feed consumption is to the right in columns I..L, while feed consumption and isolation period for incoming gilts is entered beginning on row 12.

     The following is a example of a NPV sensitivity table generated by the farrow - to - finish and segregated early weaning gilt replacement spreadsheets.

     This example shows that a gilt that costs $125 and stays in the breeding herd for one parity would have negative Net Present Value of $43.35 based on the assumptions we have entered. This means someone would have to pay you $43.45 in addition to the income the gilt generated in her only parity for you to breakeven on the initial $125 gilt investment. Conversely, if this same $125 gilt remains in the breeding herd four parities, she has a positive NPV of $77.06. This indicates, that accounting for time, expenses, and interest, purchasing a replacement gilt at this price would still yield a net income of $77.06 in today's dollars. Additionally, the table generated can be used to evaluate how long a breeding herd female (purchased at some price) must remain in the herd before a positive NPV is reached. In this example, this $125 gilt has a positive NPV after two parities, which means she has to produce three litters (assuming the stated litter size, costs of production, etc.) to be profitable.

     Notice, that as the price of gilts increases the number of parities the breeding female must remain in the herd in order to pay for herself also increases. For example, a gilt that costs $200 must remain in the herd five parities before she is profitable.

     In the remaining tables prices per head or cwt. (live price including any premiums), sow productivity, and discount rate are varied and the gilts' purchase price remains constant. The NPV interpretation in these tables is the same as for the table that varies the price of gilts which was previously outlined.

     The following is an example of the IRR (Internal Rate of Return) sensitivity analysis that is included in the gilt replacement spreadsheets.

     The Internal Rate of Return (IRR) is the discount or interest rate that would result in a NPV of $0. The IRR does not account for interest. However, it does account for time, production, expenses, and investment costs. The IRR is also the return you are receiving for investing in this gilt.

     In our example, a gilt purchased for $125 and having the specified assumptions has an IRR of -9.45% if she remains in the herd one parity. Translated, a producer would incur 9.45% investment loss if this gilt only remains in the breeding herd for one parity. On the other hand, if this gilt remained in the herd four parities (again, assuming the production, costs, etc. initially inputted by the user) she would generate a return of 15.28%. Interpreted another way, you could afford to pay an interest rate of 15.28% and still breakeven, given the assumptions inputted. A gilt that costs $200 and remains in the breeding herd through four parities earns 3.94% on his/ her investment.

Summary
      The gilt replacement worksheets can assist swine producers in determining if purchasing replacement gilts at some price is profitable decision. This spreadsheet can be customized for individual producers, because he/she has the opportunity to input their current financial and production data. In this manner a producer can make a more informed decision regarding the purchase of replacement females for the breeding herd. Additionally, a producer can use these spreadsheets to determine if breeding females remain in the herd for a sufficient number of parities that will allow he/she to recover the gilts' initial investment cost. If not, a producer must concentrate on the management of breeding herd females in order to improve their productive herd life.

References

Brake, J. H. A. te, 1986. Culling of sows and the profitability of piglet      production. Neth. J. Agric. Sci. 34:427-435.

Dial, G. and Y. Koketsu. 1996. Reproductive failure, Understanding the reasons      that sows are culled for infertility: In International Pigletter (J. Deen Ed.)      Vol. 16 pp. 15-16. Pig World, Inc. Owatonna, MN 55060.

PigCHAMP, 1998. PigCHAMP DataSHARE, 1997 Summary Report (Y.      Koketsu Ed.), University of Minnesota, St. Paul 55108.

Pigtales. 1998. Pigtales Review 1997. Pig Improvement Company International      - Pigtales , Ames, IA 50010.

Polson, J. 1977. All-gilt farrowing: An end to an era? National Hog Farmer.      Overland Park, KS 66212-2215.

notes:

• Extremely low prices for market hogs or SEW pigs will result in a #NUM! error. This means the calculated IRR is such a large negative number that Excel cannot calculate the number in 20 iterations. We are working on a text message to replace this error.
• The worksheets are protected but the necessary data entry cells are not. Thus, do not worry about crashing the spreadsheet.
• Download the Swine Replacement Evaluator here.