“If you don’t know where you are, and you don’t know where you’re going, how are you going to know when you get there?”
That quote came from a professor when Dr. Frank Novak was a student.
The professor’s words hold true, Dr. Novak told those in attendance for his presentation at the Saskatchewan Pork Industry Symposium last month in Saskatoon.
“In the business world, financial statements tell you all of this,” said Dr. Novak of Alberta Pig Company and Sunhaven Farms. “In our world, it basically comes down to the numbers and understanding our numbers, and there is a whole host of reasons for doing that.”
He pointed out that producers are going to make money about half the time.
“So, when you want to think things like financial structure and why people talk about leverage and the importance of keeping debt low it is because our numbers tell us half the time we’re going to lose money. If you understand that leverage thing, it makes you not want to take on more debt than you can handle.
“We tend to be really conservative in our group. Our strategy has always been to live to fight another day. Rule No. 1 is a strong balance sheet (and then everything else).
“A balance sheet is really driven by cash. How quickly you can turn things into cash or how quickly do you have to give somebody cash. It is a snapshot of where we are.”
Using power-point, he also talked about such things as risk management, cash flow, assets, income statements and equity.
“Assets are either current or non-current in terms of how quickly you can make them into cash. Liabilities, the things we owe to other people, are categorized by how soon they want their money back.”
Using a pie chart, there was a small piece for the owner of the operation.
“The owner is what we call the residual claimant. Everything we do, is driven by the fact we know that all we get is what’s left.”
Dr. Novak said it is important that those in production are included in discussions.
“The part for the production people is what happens when you do the things that you do. How does that impact what the rest of us get to see.
“The thing that matters for this conversation are variable costs; everything else is basically fixed. And this drives a lot of conversations in terms of what we do in pig production and how people think about it. Most of the costs are fixed, changes in productivity obviously have a big impact on your cost.”
Dr. Novak provided an example based on a 2,500-sow facility.
“If you wean five per cent fewer than your target, when you take that math and do that fixed cost of $53 a pig, and divide it by five per cent fewer pigs on this 2,500-sow operation, you end up short about $190,000 — a pretty big impact.
“Remember there were years, where the net income for that operation farrow to finish was about $190,000. So, a small change in weaned pigs cost for those operations can have a big impact.”
Is more better?
“If we wean five per cent above target, you have saved $192,000 in weaned pig costs. But here’s the problem. I only have so much nursery space, I only have so much finishing space and those extra pigs you weaned were above target when the barn was full, and end up being weaned younger; they are smaller and don’t do as well.
“We can argue about the numbers, but numbers we picked from the people we work with and our own data is we give up about $1.30 a pig in the nursery and about $2 in the finisher, so a total of $3.34.
“On every single pig that goes through the system, all of a sudden we have spent $241,000 for those extra (five per cent). So, those extra pigs cost me $50,000.”
These numbers are not small, he said.
“A one per cent mortality in this 2,500-sow flow is a $123,000 oops. It’s big money when you start adding up the numbers.”
He said movements in feed prices are a big factor.
“What happens if you have a .1 per cent increase in feed conversion in that finishing barn.”
“ It doesn’t seem like much, but if you do the math and find out how many extra kilos you use on that animal that you grew from 25 to 133 kilos, you end up paying $4.50 a pig extra — $332,000 extra dollars. That’s not good.”
He said missing weights is costly.
“Being a little bit light because either the performance wasn’t as good as you wanted it to be, or people shipped it the wrong way. You lose in this $2.93 per hog. If you lose five kilograms per pig, at the end of the day, it’s $3 per hog just for being a little bit slow for growth rate
“Add them all up, $9 a pig (for a loss of) $668,000. Not a lot of years when we don’t care about that number.”
He cited an example from his operation.
“We shipped 133-34-kilogram pigs as opposed to the 120-kilo guy you were supposed to send. You end up with a $47 bill on that pig. On the load, multiple that by 200 and that’s one little oops.
“The problem is because these are flow-through facilities you don’t miss just one load; you miss the whole barn. So, this thing just snowballs like crazy.”
Why should we care?
“We care because of the industry we are in and have to be aware of the way our industry works and what our limits are. There is a lot of money sitting there, we have very slim margins at the best of times and they are all over the place.” •
— By Cam Hutchinson