by: Simon Grey, General Manager Russia, CIS, and Europe.
Current Russian pig price is 94.9 Roubles ($1.37) per kg live-weight including VAT. At this level, good producers continue to make good profits even with this year’s higher feed price.
There has not been over much disruption to supplies from meat plant closures, although there are plants where the administrative staff is packing meat. This is one circumstance where having excessive levels of administration have helped. It does of course beg the question if in these circumstances’ administrators can work on the factory floor, what do they do in normal times?
Using the word PROFIT, in the opening paragraph triggers some thoughts. Conventional wisdom says that pigmeat is a globally traded commodity and that as a producer of a commodity, the lowest cost producer wins.
It is clear to see from the global prices attached to this report that although pig meat is globally traded, the sales price for the farmer is very far from stable globally. It also does not take a genius to see that the lowest cost producers (North America) today are losing the most money and the highest cost (China) are making the most. Total opposite of what conventional wisdom says!
The following table is from this week’s Global Market Report. I have used the lowest pig price (USA) as a base of 1 and then looked at other prices as multiples of this.
The price in Asia / China is 6.63 to 9.79 times higher than in USA!
So what has got us to this position? Maybe our obsession with cost? Perhaps if we changed focus to profit, rather than chasing the lowest cost we could create a more stable and sustainable business.
Let me be clear, in business controlling cost is important, what that really means is avoiding waste. To cut costs on a pig farm, just stop feeding the pigs! 60% less cost straight away! (By the way, I have seen this on a farm – of course, the farm went bankrupt). Obsession with cost can lead us to make bad decisions with regard to increasing profit.
For Genesus as a genetic company, genomic testing is expensive, identifying all piglets is expensive, teams of geneticists are expensive. We could reduce our costs and do none of these. There are today many companies still selling breeding stock that have no geneticists and that do not spend $1 on genomics. These companies can of course sell cheap breeding stock. This is very appealing to farmers who want to reduce their own costs. What does this do for profit?
Another bit of conventional wisdom is to use integration as the answer. In general, when farm gate price is high processors lose money and when processor margin high farmers lose money. Integration does help with this. But then the majority of integrators run all parts of the business as cost centers or profit centers, with little or no real communication between feed, farm, processing. This can/and does reduce profitability.
Why not work together as a supply chain to maximize profitability. Start with what we sell – pigmeat. How do we make the end product more desirable to our ultimate customer, the consumer? As its food, taste, and texture are certain things to consider.
The production part of an integrated company has no though of total profitability and producing the most desirable product for the end producer. It will be focused on FCR and Lean %. With pigs grown on contract at a fixed price per pig sold, selling extra kg has little or no value, reducing FCR does. Profit will be looked at per kg, so maximizing sales price with the leanest pigs makes profit look the best!
So let us rethink this one!
- The limiting factor for live production is space (buildings) and time. So more kg produced from the same building in the same time can INCREASE PROFIT FROM THE FARM. This can happen even at a higher cost of production and lower profit per kg!
- Focusing on FCR and the leanest pigs have some significant negatives when it comes to volume and quality of the product that we need to sell to the most important player – the consumer!
Low FCR reduces feed intake which reduces growth rate which reduces kg sold (from the same building in the same time). Reducing FCR reduces red muscle fibre, making pork very pale. Low FCR and ultra-lean pigs reduce marbling (intramuscular fat). Marbling is what gives pork flavor and helps with juiciness. So we end up with a product that has the lowest cost of production, the production team is probably paid a bonus for having low FCR, the slaughter plant pays more per kg for the pig, but the meat is pale, dry and tasteless that makes it undesirable to our customer.
As producers, we complain and do nothing other than focusing more on reducing our cost even further. We stop buying good genetics, we stop maintaining our farms, we use cheaper food, we stop vaccinations/treatments, we reduce our production staff!
Time perhaps to totally rethink conventional wisdom. Being the lowest-cost producer of a product nobody wants to buy will not make you a PROFIT.
This post was written by Genesus