University of Illinois Extension

Illini PorkNet Papers

The Economics and Profit Potential of Hog Production
Dale H. Lattz
07/10/1998

Higher market hog prices in 1996 causing higher total returns resulted in Illinois hog producer profits to increase by $3.71 per hundredweight produced compared to 1995. Total returns for the farrow-to-finish hog enterprises exceeded total production costs by $5.05 per hundredweight produced in 1996. The 1995 return was $1.34. For the five-year period, 1992 through 1996, returns exceeded production costs by $1.01 per hundredweight. All of the past five years show a positive return for farrow-to-finish enterprises except for 1994 (Table 3).

The total cost of production in 1996 averaged $49.66 per hundredweight of pork produced, compared with $41.52 in 1995 (Table 1). Feed costs made up 67 percent of total costs, or $33.48 in 1996, as compared to $25.39 in 1995. Nonfeed costs accounted for $16.18 in 1996, an increase of only 5 cents from 1995. With total returns (on an accrual basis) averaging $54.71 per 100 pounds of pork, the average producer in this group exceeded total costs by $5.05 per 100 pounds produced. The 1995 return above all costs was $1.34.

The records for the hog enterprises reported in Table 1 were divided into groups according to the number of litters produced. The group farrowing fewer than 350 litters for the year averaged 202 litters. The group farrowing 350 or more litters averaged 760 litters.

The total cost of production per 100 pounds of pork averaged $1.80 less for the large enterprises than for the small ones. The most significant cost difference between the two groups of farms was in the feed cost per 100 pounds of pork produced. The large enterprises had a $3.55 lower feed cost than the small ones, $31.53 compared with $35.08. The $3 per ton lower price paid for commercial feeds by the larger enterprises and the 46 fewer pounds of feed that it took to produce 100 pounds of pork accounted for the lower feed cost. The number of pigs weaned per litter averaged 8.6 for the large enterprises and 8.0 for the small ones. Other production variables, such as the rate of death loss, were not significantly different.

The returns above all costs were $4.48 per 100 pounds of pork produced for the small enterprises and $5.74 for the large ones, a difference of $1.26. Total returns were $0.54 higher per 100 pounds of pork produced for the small enterprises as compared to the large enterprises. Management practices and production technology--such as the choice of building systems, method of transporting hogs to market, and on-farm versus off-farm systems for feed processing--may have affected the individual cost items reported in Table 1. However, the return above all costs should accurately reflect the relative profitability of the two groups of hog enterprises.

The cost data reported in Table 1 have been divided into two categories: "Cash costs" and "Other costs." This classification of production costs is important when making short-run management decisions concerning the level (volume) of production, particularly during periods of low prices.

The average cash costs of production in 1996 ranged from about $38.91 to $42.56 per 100 pounds of pork produced (Table 1). Feed is included as a cash cost, although for most producers a major share of the grains are farm-raised The readily available alternative cash market for grain makes the farm-raised feed the same as cash.

The "Other costs" category includes depreciation, labor, and an interest charge on all capital, although on most farms part of the labor and the interest charge are cash costs. The proportion of labor that is hired largely depends on the farm's size. A one-man farm does not hire much labor, while a four-man farm may hire a major share of the labor.

The share of the interest charge that is a cash expenditure depends upon the owner's equity in the business. It could range from zero to nearly 100 percent. On most farms, some share of the interest charge will be paid in cash.

Current feed costs can be estimated by using Table 2 as a reference. For example, with the price of corn at $2.50 per bushel and the price of supplement at $16 per hundredweight, the cost of feed would be $26.10 per hundredweight of pork produced. Estimating the 1997 average annual price for corn at $2.70 per bushel and supplement at $18.00 per 100 pounds, the average feed cost in 1997 would be $28.80 per hundredweight of pork produced.

Producers should evaluate expected returns for more than one year before making new investments in hog production facilities. For 1992 to 1996, the return above all costs except management averaged $1.01 per 100 pounds of pork produced for all enterprises included in the study. The returns averaged $0.13 per 100 pounds of pork produced for the small enterprises and $1.37 for the large ones (Table 3). The difficult question confronting producers is how profitable the industry will be in the upcoming five years. Recent profitability has resulted in expanded production, lower hog prices and reduced margins. At the same time, feed prices may stabilize at a higher level than what they have been in the early and mid 1990s. The amount of continued expansion or liquidation, the strength of consumer demand for pork, and the availability of reasonably priced corn and protein supplements, will largely determine the profitability of hog production during the next five years.

Producers in the high one-third group in terms of efficiency earned an average return above all costs of $5.60 per hundredweight of pork produced for the 1992 to 1996 period (Table 3). The average for all producers during that period was $1.01 per hundredweight produced, or $4.59 less than that received by the high one-third group.

Table 4 provides an overview of the costs and returns for the farrow-to-finish hog enterprise from 1992 through 1996. It also shows the changes in three key production factors during that period--feed conversion, pigs weaned per litter and death loss. Feed conversion has improved significantly during that time period.

The key lesson to be learned from Table 5 is that every hog producer should determine the level of production efficiency in their operation so that they can realistically evaluate the potential for profit and prospects for staying in business. It is especially important for producers who are considering expansion and for potential newcomers to the business to budget carefully by using reasonable projections of input requirements and the efficiency level that can be maintained.

Table 1. Costs and returns for the farrow-to-finish hog enterprise in Illinois by size of enterprise, 1996

Average number of litters per year
All Under 350 350 or more
Number of farms 113 62 51
Average per farm
Number of litters 454 202 760
Pounds of pork per litter 1,953 1,934 1,976
Return per $100 of feed fed $164 $157 $173
Returns above feed cost per litter $415 $384 $452
Pigs weaned per litter 8.3 8.0 8.6
Death loss: percent of weight produced 2.5 2.5 2.5
Pounds of feed per hundredweight produced    
Farm grains 274 292 253
Commercial feeds 87 90 83
Total concentrates 361 382 336
Cost per 100 lb of commercial feeds $17.35 $17.42 $17.27
Cost per 100 lb of concentrates $9.20 $9.15 $9.25
Price received per hundredweight of pork sold $54.02 $53.57 $54.56

per hundredweight of pork produced

Total returns $54.71 (42.86)a $54.95 $54.41
Cash Costs
Feed $33.48 (25.39)a $35.08 $31.53
Operating expenses
Maintenance and powerb 3.72   3.78 3.65
Livestock expense 2.45   2.41 2.49
Insurance, taxes, and overhead 1.27   1.29 1.24
Total operating expenses $7.44   $7.48 $7.38
Total cash costs $40.92 (31.87)a $42.56 $38.91
Other costs
Depreciationc $2.25   $2.13 $2.40
Labor 3.81   3.35 4.38
Interest charge on all capital 2.68   2.43 2.98
Total other costs $8.74 (9.65)a $7.91 $9.76
Total nonfeed costs $16.18 (16.13)a $15.39 $17.14
Total all costs $49.66 (41.52)a $50.47 $48.67
Return above all costsd $5.05 (1.34)a $4.48 $5.74

a Figures in parentheses are for 1995. b Includes utilities; machinery, equipment, and building repairs; machine hire; and fuel. c Includes machinery, equipment and building depreciation. d No charge was made for management

Note: The average price of corn in 1996 was $3.70 per bushel.

Source: Department of Agricultural and Consumer Economics and the Illinois FBFM Association.

Table 2. Feed cost for hogs per hundredweight of gaina

Price of supplement Price of corn per bushel
per hundredweight $1.50 $2.00 $2.50 $3.00 $3.50
$12.00 $17.70 $20.20 $24.40 $25.20 $27.70
14.00 19.40 21.90 24.40 26.90 29.40
16.00 21.10 23.60 26.10 28.60 31.10
18.00 22.80 25.30 27.80 30.30 32.80
20.00 24.50 27.00 29.50 32.00 34.50
22.00 26.20 28.70 31.20 33.70 36.20

a Sow and litter, farrow-to-finish. The feed conversion is based on data from Illinois Farm Business Farm Management Association records, and was set at 5.0 bushels of corn and 85 pounds of protein supplement per hundredweight of pork produced.

Table 3. Returns above all costs by size of enterprise and efficiency, 1992 through 1996, and five-year averages, 1977-19964

Average number of litters per yearb
Year All Under 250 250 or more High 1/3

 

Efficiency
per hundredweight of pork produced
1992 1.09 -0.32 1.70 5.71
1993 3.18 2.71 3.34 7.58
1994 -5.57 -8.12 -4.69 1.01
1995 1.34 1.89 0.76 5.81
1996 5.05 4.48 5.74 9.93
Averages
1977-1981 $1.15 $-1.87 $-0.11 $3.53
1982-1986 1.93 0.42 3.30 6.35
1987-1991 3.76 1.89 4.76 8.32
1992-1996 1.01 0.13 1.37 5.60

a No charge was made for management.

bBefore 1995, size was based on over and under 250 litters.

Table 4. Costs and Returns Per Hundredweight, Illinois Farrow-to-Finish Hog Enterprises, 1992-1996

1996 1995 1994 1993 1992
Total returns $54.71 $42.86 $35.70 $44.73 $41.50
Feed costs $33.48 $25.39 $25.93 $25.50 $24.86
Returns above feed costs $21.23 $17.47 $9.77 $19.23 $16.64
Total nonfeed costs $16.18 $16.13 $15.34 $16.05 $15.55
Total all costs $49.66 $41.52 $41.27 $41.55 $40.41
Returns above all costs $5.05 $1.34 $-5.57 $3.18 $1.09
Pounds of feed per cwt. produced
Farm grains 274 276 285 277 284
Commercial feeds 87 89 93 93 89
Total concentrates 361 365 378 370 373
Price of corn, per bushel $3.70 $2.61 $2.44 $2.28 $2.35
Pigs weaned per litter 8.3 8.3 8.5 8.4 8.5
Death loss: percent of weight produced 2.5 2.7 2.0 1.9 1.9

Table 5 shows the effect of production efficiency on net hog returns. The high-efficiency hog producer will have more money for debt servicing, improved family living, and reinvestment than the average or below-average producer.

Table 5. Farrow-to-finish enterprise summary by level of efficiency, 1996

Level of Efficiency
All Farms Lo 1/3 Hi 1/3 Hi 1/5
Number of litters farrowed 454 290 573 646
Pounds of pork per litter 1,953 1,845 2,092 2,096
Returns above feed cost per litter $415 $294 $546 $562
Pigs weaned per litter 8.3 7.8 8.7 8.9
Death loss, percentof weight produced 2.5 3.4 2.0 2.1
Total return $54.71 $53.94 $55.95 $55.36
Feed cost per 100 pounds produced $33.48 $38.00 $29.84 $28.55
Returns above feed costs $21.23 $15.94 $26.11 $26.81
Pound of feed per 100 pounds produced
Farm grain 274 310 244 244
Commercial feeds 87 96 79 80
TOTAL 361 406 323 324
Cost per 100 lbs. commercial feeds $17.35 $17.97 $17.43 $15.51
Cost per 100 lbs. concentrates $9.20 $9.30 $9.25 $8.80

Table 6 provides a summary of the quarterly United States crop reports for sows farrowing. The first two entries in each block are intentions, the third is the final number. The percent change from the preceding year is also shown.

Table 6. Number of sows farrowing, United States, and percent change from preceding year

Date of Hogs and Pigs Report March-May June-August September-November December-February
Sows to Farrow (000), % Change
December '96 2894 -2   2717 -3 2765 +1
March '97 2962 NC 2816 +2   2677 -2
June '97 2952 NC 2910 +5 2888 +6  
September '97   2898 +5 2894 +7 2880 +8
December '97        
March '98        
June '98        
September '98        
December '98        

Table 7. Hog production costs and profits by quarters, per 100 pounds produced1

1990-1991
PRODUCTION COSTS 1 2 3 4 1 2 3 4
Corn and grain $12.74 $14.53 $13.72 $12.20 $12.96 $13.34 $13.07 $13.01
Protein 12.96 12.41 12.75 12.75 12.33 12.45 12.62 13.22
Non-feed items 16.75 17.50 17.75 17.75 17.25 17.25 17.00 16.75
TOTAL $42.45 $44.44 $44.22 $42.70 $42.54 $43.04 $42.69 $42.98
6-MARKET PRICE $49.45 $59.01 $57.67 $51.67 $51.50 $53.34 $50.85 $39.84
Profit or loss (+or-) $7.00 $14.57 $13.45 $8.97 $8.96 $10.30 $8.16 $-3.14
1992-1993
PRODUCTION COSTS 1 2 3 4 1 2 3 4
Corn and grain $13.36 $13.21 $11.65 $10.45 $10.87 $11.34 $11.65 $12.90
Protein 12.67 12.92 12.75 12.79 13.13 12.84 13.77 13.47
Non-feed items 16.50 16.25 16.00 15.75 16.00 16.00 16.00 16.25
TOTAL $42.53 $42.38 $40.40 $38.99 $40.00 $40.18 $41.42 $42.62
6-MARKET PRICE $38.68 $44.83 $43.86 $41.84 $43.96 $46.83 $47.49 $43.23
Profit or loss (+or-) $-3.85 $2.45 $3.46 $2.85 $3.96 $6.65 $6.07 $0.61
1994-1995
PRODUCTION COSTS 1 2 3 4 1 2 3 4
Corn and grain $14.00 $13.60 $11.10 $10.35 $11.30 $12.50 $13.50 $14.90
Protein 13.90 13.22 13.18 12.62 12.33 12.24 12.28 12.33
Non-feed items 15.75 15.50 15.50 15.25 15.75 15.75 16.25 16.25
TOTAL $43.65 $42.32 $39.78 $38.22 $39.38 $40.49 $42.03 $43.48
7-MARKET PRICE $45.19 $42.44 $40.07 $30.56 $38.19 $38.57 $48.32 $42.86
Profit or loss (+or-) $1.54 $0.12 $0.29 $-7.66 $-1.19 $-1.92 $6.29 $-0.62
1996-1997 ---est.---
PRODUCTION COSTS 1 2 3 4 1 2 3 4
Corn and grain $17.35 $21.60 $21.20 $14.10 $13.95 $13.90 $12.80 $13.00
Protein 14.28 14.96 14.62 14.37 15.47 16.53 15.70 14.70
Non-feed items 16.25 16.00 16.00 16.25 16.25 16.25 16.25 16.25