26 March 1999

Price crisis strikes hard

The severe downturn in pig prices combined with the cost

of complying with welfare legislation has seen Easton Lodge

pig unit record a £112,000 loss. Simon Wragg reports

LOW prices, higher welfare and relief labour costs have wiped out previous years profits at Easton Lodge, plunging it into losses that continue today.

The financial accounts ending Nov 30 – the middle of the price crisis – saw trading losses top £112,000 compared with a £65,000 profit in the previous year. Total losses are expected to exceed £160,000 until pig prices recover to break-even.

Accountant Giles Penn of Deloitte & Touche says that while prices were expected to fall, no one in the industry foresaw the severity of the crisis nor how long it would last. The effect of over-production in Europe has been exacerbated by the collapse of key EU export markets in Russia and Asia.

Pig buyers, spurred on by retailers, added to producers misery by forcing forward the ban on stall and tethers. Easton Lodge was no exception. "The timing was appalling," he says.

Despite financial uncertainties the new £26,600 90-sow loose straw yard was completed by builders with the help of on-farm labour. Farm staff then continued to work solidly throughout July to convert the old stall houses to cubicle housing – filling in slurry channels, welding new pens and laying concrete at a capital cost of £6600.

"We had plenty of time to plan for the conversion process, but at the time the poor trading conditions meant it was essential to use farm labour to keep costs down," says farm manager, John Lambkin. "Staff expenditure had already risen with relief staff charges to cover sick leave for head stockman, John Knighton. With senior staff there are no corners to be cut when hiring in relief cover."

As a result, Easton Lodges overall labour costs are up 11% on last year to £64,766. As before, for ease of comparison with other farms the accounts exclude unit manager Jasper Renolds salary and treat him as a tenant and the sole trader.

The straw-based sow yard and dry sow cubicles will be an additional burden on annual costs (see table). Mr Renold suggests that extra feed, bedding, labour and machinery expenses will add £14,200 a year to costs.

"It is difficult to see where we are going to obtain a premium to claw this back. However, the main cost after capital depreciation is feed and the dump feeding system works well. It is enabling us to control sow condition, although some boars are greedy."

With careful stockmanship and the change to PIC stock sow performance did not suffer with the move. Output increased by 1.2 piglets reared a sow a year to 23.4.

"More importantly Easton Lodge rose above the 23.2 average in Signet recorded herds, closing the gap in competitive terms," says Mr Penn.

A new service routine allowing more time for AI will also help ensure improvements continue.

Despite this higher rearing rate, piglet mortality remains a concern. It is still running at about 14%, although latest figures suggest it is falling to 12%. New-born piglets are treated for coccidiosis, which will help to reduce mortality further.

Overall, the total number of pigs sold increased by 273 to 8062. "It is without doubt the best improvement of the year and ahead of budget. Output has increased by 15t to 580t pigmeat with the same number of sows," comments Mr Penn. This has allowed fixed costs to be spread further. Greater improvements are possible, but with dry sows taking up a weeks worth of finisher space – potentially worth 3.75kg a carcass – there are limitations on space.

"If we were making money at the time, we might have added an extra 40 dry sow spaces when we put up the new loose sow house. This would have freed up the finishing accommodation and enabled us to consistently achieve a 74kg carcass, rather than the 71.9kg achieved this year," adds Mr Lambkin.

"Our problem now is one of space to achieve the specific weight grades and price premiums on all our pigs," he adds.

To help ensure adequate finishing weights are achieved, attention is being focused on lifting transfer weights for weaners and feed conversion in growers which suffered slightly during the year.

"Last year Pulmotil was added to flat-deck rations to control APP and that helped growth rates in the second half of the year. Following the year end, and with veterinary advice, coccidiosis vaccination has helped lift weaning weights to 7kg a pig. But transition diets – phase feeding – for young grower pigs has not worked as well as expected," explains Mr Renold.

Vaccination against pneumonia in 1997 and improvements in ventilation last year are also helping boost finisher performance and growth rates increased to average 731g a day. As a result, veterinary advice and medicine costs have crept up by over £1250 to £18,367, but can be offset against those better growth rates.

Feed costs fell from £343,000 to £328,000, despite increased production. This saving of £15,000 was insignificant compared with the drop in total income from the unit of £167,000.

"With hindsight, the results show that the unit recorded a gross loss before overheads in the last three months of the financial year," says Mr Penn. During this period gross losses before overheads were high enough to justify early culling of stock, if an adequate price could have been obtained, rather than rearing and finishing them, he adds.

After Malton Bacon served notice last summer following Easton Lodges decision not to accept the new contract, the units marketing co-op found another abattoir whose price is linked to the AESA. "We had complied with all of our buyers requirements and could not see the price going down as low as it did. There was a sense of being let down," says Mr Lambkin.

Rock bottom was reached in October when losses were running at £4500 a week. "However, we still have to keep an open mind on which outlet will be better in the long term," says Mr Lambkin.

The units break-even figure of 102p/kg was topped only in one month during the year. The cash break-even before depreciation and valuation changes was 93p/kg and was passed only in six months of the year.

"On a positive note, careful planning has helped keep capital costs of complying with legislation down to £46,652 for the year. This will increase depreciation, which, combined with additional straw, labour, feed and possibly replacement costs for the loose sow yard, will add to costs without increasing output from the unit," warns Mr Penn.

"Another strength this year has been not to lose sight of those elements that guarantee production, such as buying replacement gilts," adds Mr Penn. "It has taken commitment as cull sow prices plummeted from £90 a head to £30 a head by August which increased the cost of maintaining the herd."

Total income fell by £167,095 to £491,037 despite increased output. The resulting gross margin of £43,953 was dwarfed by overheads of £148,826, leaving a net farm loss of £112,088.

"While this is the picture to the end of the financial year, there have been a further four months of poor prices – well below break-even – and that will have had impacted further on the units finances," warns Mr Penn.

At the financial year end Easton Lodge was solvent, but that may now have changed. "However, both cull and finished prices are rising and that will affect valuations," he adds.

As losses mounted, a review of short-term cashflow requirements and longer-term strategy was undertaken. "The review highlighted the ongoing need for financial support to continue in production, but with the past few years of retained profits and at last a rising price, there is still sufficient confidence to continue," adds Mr Lambkin.

"It is now heads down and get on with the job," he says.

lWant a copy of Easton Lodges pig accounts? Call Giles Penn on 01132-439021. &#42

Loose sow yard

costs (£)

Building and machinery

depreciation 4,200

Feed 5,500

Straw (50t) 1250

Mucking out 250

Labour (inc NIC) 3,000

14,200

Cost (p/kg dwt) 2.45

Fixed costs year ended Nov 30, 1998 (£)

1998 1997

Labour

Labour 61,200 55,112

Farm office 3,566 3,000

64,766 58,112

Power and machinery

Machinery and

vehicle repairs 9,656 10,768

Fuel and oil 1,830 2,172

Electricity 12,798 12,770

Contract work 2,890 2,547

Plant and machinery

depreciation 2,535 2,282

29,709 30,539

Property

Water rates 1,250 580

Property repairs 10,311 18,978

Depreciation 19,590 14,724

31,151 34,282

Other overheads

General insurance 2,029 2,029

Professional fees and

subscriptions 4,490 798

Management fees 15,631 14,652

Office and phone 1,050 1,159

Sundry expenses – 784

23,200 19,422

Rent 7,322 7,160

Deloitte & Touche

Deloitte & Touche Agriculture is a national firm of chartered accountants, taxation and business advisers. It concentrates on providing practical solutions for professional farmers, landed estates and agricultural businesses.

Pig trading account year ending Nov 30, 1998 (£)

12 mths to 12 mths to

30.11.98 30.11.97

Cull sows 9,687 18,165

Cull boars 283 1,225

Finishers 481,067 638,742

491,037 658,132

Opening

valuation 181,706 213,383

Purchases 34,744 24,597

216,450 237,980

Closing

valuation 150,097 181,706

66,353 56,274

Output 424,684 601,858

Variable costs

Purchased

feed 328,195 343,146

Bedding 8,221 6,739

Haulage 12,972 11,215

Vet and med 18,367 17,125

AI 4,499 4,072

Livestock

sundries 8,477 6,887

380,731 389,184

Gross margin43,953 212,674

Profit and loss account (£) year ended Nov 30, 1998

1998 1997

Gross margin

Pigs 43,953 212,674

Sundry income 107 1,706

44,060 214,380

Fixed costs

Labour 64,766 58,112

Power and

machinery 29,709 30,539

Property 31,151 34,282

Other

overheads 23,200 19,422

148,826 142,355

Net farm loss

(before rent) (104,766) 72,025

Rent 7,322 7,160

Net farm

loss/income (112,088) 64,865

Pig unit statistics

E Lodge E Lodge MLC top third

12 mths to 12 mths 12 mths to

30.11.98 30.11.97 30.11.98

Breeding herd (sow/gilts/boars)

Average number of productive sows 358 359 354

Litters a sow and gilt a year 2.38 2.37 2.4

Piglets reared a sow a year 23.4 22.2 24.7

Piglets a litter 11.41 10.70 11.54

Piglets mortality (% of pigs born alive) 13.7 12.5 10.5

Transfer out weigh (kg) 6.5 6.4 6.4

Rearing herd

Mortality (%) 1.8 1.7 1.6

Transfer out weight (kg) 39.6 42.6 42.7

Average daily lw gain (g) 494 522 532

Feed conversion ratio (kg feed/kg lw) 1.67 1.71 1.73

Feed cost (p/kg lw) 38.73 38.32 31.46

Finishing herd

Mortality (%) 2.3 3.3 1.9

Sale weight (kg) 94.6 95.5 92.3

Average daily lw gain (g/day) 731 694 791

Feed conversion (kg feed/kg lw) 2.87 2.73 2.55

Feed cost (p/kg lw) 39.09 42.87 32.71

Killing out (%) 76 76 76

Carcass weight (kg) 71.9 72.5 70.7

Deadweight price (p/kg dwt) 83.1 113.1 80.7

Cost a finished pig (£)

1998 1997

Variable and

replacement costs 54.2 54.7

Labour 8.03 7.46

Power and

machinery 3.69 3.92

Property 3.86 4.4

Other overheads 2.88 2.49

Rent 0.91 0.92

Break-even

price a kg 1.02 1.02

Average selling

price a kg 0.83 1.13