29 September 2000

Pig production cost figures are not high enough

By Philip Clarke

OFFICIAL figures on pig production costs often underestimate the true charges involved, leading to lower contract prices from buyers.

That is the claim of Staffordshire pig farmer Roger Mercer, who finishes 2000 animals a week at Blakenhall Park, Barton-under-Needwood, and other units around the county.

In particular, he points to the recent Exeter University Economics of Pig Production survey (Business, Sept 1), which quoted average production costs for 1998/99 at 86p/kg deadweight.

Mr Mercer says there are some glaring omissions, most noticeably MLC levies, rendering charges, transport costs, marketing fees and insurance.

"For some reason, these have been deducted from the sale price, rather than being included as a cost of production," he says. "These items add up to £4.50 a pig, equivalent to about 6.5p/kg. If you are going to quote a cost of production, then it should include all the costs."

No appearance

Mr Mercer also claims that many investment and maintenance costs do not appear in the calculation simply because pig farmers have been so cash-strapped that they have had to postpone all such expenditure.

"But just because they have been delayed, it does not mean they can be ignored."

He reckons this would add a further 1-2p/kg to production costs.

Mr Mercer also points out that general farm overheads – such as interest on working capital and payment for management time – are left out of the calculations. He estimates these at 6.5p/kg.

"These extra costs amount to about 14p/kg, bringing the average cost of production up to £1 a pig."

Report author Andrew Sheppard accepts some of Mr Mercers points, but not all of them. "With regard to factory deductions, I believe our approach is totally defensible, not least because the Average All Pigs Price is also net of such deductions," he says.

But on haulage, Mr Sheppard says Mr Mercer is probably right, because most pig producers now arrange and pay for their own transport. "I believe there is a case for moving haulage across to costs in future surveys."

As for repairs and investment, Mr Sheppard accepts that delays have occurred, and "the true long-run average production cost is probably somewhat greater". But some of these costs are attributed to breeding and rearing activities, so are accounted for within the store pig value.

He also challenges the claim that interest and management charges are overlooked. "Our objective is to arrive at a net margin, from which interest on working capital and payment for the operators own input have yet to be made." This is the costings norm, he says.

But this is the crux of the problem, says Mr Mercer. "If people outside farming look at a break-even value, they assume it includes everything. Most farmers have to borrow their working capital, which is a very real cost."

The headline figure of just 86p/pig is misleading, he says, and gives customers a false impression.

"It is extremely difficult trying to negotiate realistic contract prices when the information is produced in such a manner. Understated figures also have a detrimental effect when the government comes to consider compensation for classical swine fever."

Mr Mercer has requested a meeting with the Meat and Livestock Commission, the universities and others involved in farm costings to try to thrash out a new industry standard.

But he concedes that farmers are often their own worst enemies when it comes to costs, publicly quoting how cheaply they can produce something.

"I have seen many cases of peoples arable costs where they accurately record seeds, fertilisers and sprays, yet omit a rent for owner occupied land, realistic depreciation and a sensible storage charge. These assets have an opportunity cost and it is correct that they should be set against the enterprise."