14 July 1995

HEAVY LOSSES CLAWED BACK

A REVERSAL OF FORTUNES AS

Considerable cost savings led to a reversal of fortunes at FARMERS WEEKLYs Easton Lodge pig unit in the last financial year, despite a lower pig price. Philip Clarke discussed the turn-around with pig manager, Jasper Renold, and Touche in Agriculture accountant Giles Penn

PIG production at Easton Lodge bounced back in 1994 after the previous years heavy trading losses.

Although the bottom line was still tinged with red, the net farm loss of £4326 in the 12 months to November was far removed from the previous seasons loss of £56,825.

The key factors behind this improvement, according to Giles Penn of accountants Touche in Agriculture, were the higher stocking rates and the considerable savings in feed costs. These offset the effects of a lower average price (down 6p to 96.56p/kg dw) and continued low productivity in the breeding herd.

The effect is seen in the pig trading account, where gross output has risen from £415,175 to £441,132 on the back of the greater numbers kept.

For example, the breeding herd was expanded from 349 to 362 sows. "This is the maximum we can keep," said pig manager, Jasper Renold. "If we pushed it any further, we would have to wean at less than 23 days and that we are loath to do."

With more sows and a marginal increase in the number of pigs a sow a year (to 21.7) the total number finished increased from 7119 to 7518.

But the most significant boost to gross margin has come from the savings in variable costs. Feed, bedding, haulage, "vet and med" and sundries were all lower, taking total variables to £330,028 – almost £17,000 less than in 1993.

As a consequence, gross margin has almost doubled at Easton Lodge from £68,256 to £111,104.

"It has taken a lot of hard work to get this far and it is a tribute to the efforts of staff and the imagination of management," said Mr Penn.

The savings in feed cost in particular have come at a time when others in the industry have been suffering from higher charges as a result of the buoyant grain prices in the arable sector.

But since July 1994 Easton Lodge has been heavily involved with a new buying group. This invited a number of suppliers to tender for the business of six producers owning 1600 sows.

"Although this led to instant cost savings of about £5/t, we also experienced some early nutritional problems, as the ration wasnt quite right," said Mr Renold. "But now that is sorted things are going very well.

"Price is not the only consideration. Now we know exactly what we are getting, as our supplier is not allowed to change the ration without notifying us first. It is far more controlled than the least cost formulation approach of the national compounders."

In economic terms total feed cost fell from £307,576 to £295,341 – or from £43.20 to £39.28 in terms of cost a pig.

At the same time there was a marked improvement in the feed conversion ratio, reflecting the better nutritional control. For the finishing herd this went from 2.84:1 to 2.75:1. "Without this improvement the unit would not have been able to maintain carcass weight at 60kg while putting through an extra 400 pigs, given the limitations on finishing accommodation," observed Mr Penn. "Carcass weight would probably have slipped to a less saleable 55kg."

The overall result has been to bring Easton Lodges feed cost/kg liveweight gain closer to the MLCs "Top Third" (see graph).

But though the better gross margin (£111,104) was welcome, it was still not enough to cover overhead costs after rent and finance charges, as can be seen from the profit and loss account.

Once again the staff made great efforts to control overheads, with savings in all areas except labour. In total these charges were cut 9% to £109,184. This left a small profit of £2204 but after rent and finance that fell to the net farm loss of £4326 already mentioned. (For the purposes of these accounts, Mr Renold is treated as the sole tenant and his salary is left out.)

Closer examination of these charges (see overhead costs) shows that the key savings came from electricity (the direct result of an independent energy audit), fewer property repairs and lower depreciation (a reflection of the recent lack of investment).

The lower costs had the effect of reducing the break-even price to £58.28 a pig (97.5p/kg dw) compared with £68.34 a pig (113p/kg dw) last year. Indeed, only the poor pig price prevented a profit being made.

"This was very much a no spend year," said Mr Renold. "But this is not sustainable and we are going to have to carry out extensive building work in the next two years, not least because of the impending stall and tether ban." The ability to make further cost savings, therefore, appears limited.

Analysis of the pig units cash flow gives some cause for optimism, however (see graph).

"Total sales run clear of total costs in alternate months," observed Mr Penn. "This shows how cash received one month is used to pay the bills the next – overall, a well controlled situation.

"The most encouraging sign, however, is that the accounting period ended with two months of positive cash flow. This bodes well for the year ahead, although the unit still has a long way to go to cover the managers salary or refund the arable loan." (To prevent the pig account from going into overdraft £20,000 was transferred as a "loan" from the arable account in December 1993.)

But the immediate priority, says Mr Penn, is to tackle sow productivity. "The rise in pigs a sow a year was entirely due to the increase in the number of litters. But an extra 0.5 piglets a sow a year is achievable and will lead to extra funding for other areas."

Mr Renold confirms that this is already managements policy. "We used to give our sows a second chance if they suddenly threw a small litter. But now we are more ruthless, especially with the price of sow meat where it is!"

And although making improvements in this area is like "turning a supertanker", progress is being made.

Together with the continued benefits of the feed buying group, the better pig price and the fact that, in many areas of performance, Easton Lodge is now matching the MLCs Top Third, a return to profitability is the strong prediction for 1995.


Pig trading account for year to end Nov 1994 (£)

12 months12 months

to to

30.11.94 30.11.93

Sales

Cull sows18,65415,768

Cull boars1,536759

Finishers433,646441,598

453,836458,125

Opening

valuation154,903165,844

Purchases30,06432,009

184,967197,853

Closing

valuation172,263154,903

(12,704)(42,950)

Gross

output441,132415,175

Variable costs

Purchased

feed295,341307,576

Bedding8,0698,746

Haulage9,2079,292

Vet and

medicine8,21011,353

AI2,8222,150

Sundries6,3797,802

330,028346,919

Gross

margin111,10468,256


Profit and loss account for year to end Nov, 1994 (£)

12 months12 months

to to

30.11.9430.11.93

Gross margin

Pigs111,10468,256

Other income284268

111,38868,524

Fixed costs

Labour48,44746,602

Power and

machinery25,31330,581

Property cost17,09322,220

Other

overheads18,33120,046

109,184119,449

Net farm income (before rent

and finance) 2,204(50,925)

Rent and

finance6,5305,900

Net farm

loss(4,326)(56,825)


Easton Lodge pig unit statistics

E LodgeE LodgeMLC top third

12 months12 months12 months

to 30.11.94to 30.11.93to 30.11.94

Breeding herd

Sows\gilts\boars

Average number of productive sows362349285

Litters per sow & gilt a year2.342.272.40

Pigs per sow a year21.721.123.9

Piglets

Mortality (% of pigs born alive)11.911.210.5

Transfer out weight (kg)7.07.66.3

Rearing herd

Mortality (%)1.41.22.2

Transfer out weight44.544.539.9

Average daily lw gain (g a day)544570525

Feed conv ratio (kg feed/kg lwg)1.761.741.59

Feed cost (p/kg lwg)39.2742.1332.73

Finishing herd

Mortality (%)1.81.72.0

Sale weight (kg)77.878.578.4

Average daily lw gain (g a day)705700711

Feed conv ratio (kg feed/kg lwg)2.752.842.50

Feed cost (p/kg lwg)44.7549.8640.45

Killing out (%)777777

Carcass weight (kg)59.860.558.7

Deadweight price (p/kg dw)96.56102.5998.95


Overhead costs for year to end Nov, 1994 (£)

12 months12 months

toto

30.11.94 30.11.93

Labour

Labour45,38343,924

Farm office3,0642,678

48,44746,602

Power and machinery

Machinery and vehicle

repairs5,7896,556

Fuel and oil1,2211,775

Electricity13,33516,990

Contract work1,8992,280

Plant and machinery

depreciation3,0692,980

25,31330,581

Property costs

Water rates717265

Property

repairs5,8838,788

Depreciation10,49313,167

17,09322,220

Other overheads

General

insurance2,3292,780

Professional fees/

subscriptions1,3302,359

Management

fees13,28512,890

Telephone1,0591,188

Sundries328829

18,33120,046

Rent and finance

Rent6,5305,900


Cost per finished pig (£)

12 months12 months

to to

30.11.9430.11.93

Cost per pig

Variable costs43.8948.73

Net replacement cost & change

in valuation(1.00)2.00

42.8950.73

Labour6.446.54

Power and

machinery3.374.30

Property2.273.12

Other2.442.82

14.5216.78

Rent0.870.83

Total cost

per pig58.2868.34

Average sales price

per pig57.7462.05

Net margin

per pig(0.54)(6.29)