Genesus Global Technical Report, Determining the Economics of a Nutrition Program

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Determining the Economics
of a Nutrition Program

by Clarence Froese, M.Sc., Director of Nutrition, Genesus Inc.

Feed is the largest single variable cost in pig production. Setting dietary specifications and selecting appropriate ingredients for each production situation are two critical components of a cost-effective nutrition program. In addition, the response of the pig to varying dietary nutrient levels must be considered in any economic evaluation.

Two calculations commonly used in the industry to assess the economics of a feeding program are (1) cost per unit of gain and (2) income over feed cost.

  1. Cost per unit of gain (COG) is defined as: COG = Feed:Gain Ratio x Diet Cost ($/kg or lb.). For example, a pig using 280 kg (616 lbs.) of feed to gain 100 kg (220 lbs.) will have a calculated feed:gain ratio of 2.8:1. If the average diet cost to produce this gain is $0.30/kg ($0.136/lb.), then the COG will be $0.84/kg ($0.38/lb.).
  2. Income over feed cost (IOFC) is defined as: IOFC ($/pig) = Revenue ($/pig) – Feed cost ($/pig). For example, if the pig in the above example is sold at a live weight of 130 kg (287 lbs.) and a market price of $1.20/kg live ($0.54/lb. live), it will generate $156/head in revenue. If the average diet cost is $84/head, then the IOFC will be $72/head ($156 revenue – $84 feed cost).

Both cost of gain and income over feed cost can be used to evaluate the cost-effectiveness of nutrition programs. Cost of gain is the most commonly used calculation to measure diet cost-effectiveness. However, its accuracy is limited to scenarios where only the feed:gain ratio is expected to change as a result of dietary manipulation. Income over feed cost accurately identifies the most profitable nutrition program irrespective of the number of production parameters affected. It is thus the preferred method for determining the economic outcome from different nutrition programs under various production and pricing scenarios.

The following table illustrates an example that uses both cost of gain and income over feed cost to evaluate the economics of using three dietary energy level specifications (low, medium and high) under an average market price scenario.

As expected, the low energy diet has the lowest cost; about $31/tonne ($28/ton) less than the diet with the highest energy level. This cost advantage is offset by the fact that less feed per unit of gain is required by pigs consuming the higher energy diets. Applying the cost of gain calculation to these figures results in identification of the low energy diet as being the most cost-effective option. Pigs on this diet will have a cost of gain that is 1.6 cents per kg (0.73 cents per lb.) less than pigs consuming the high energy diet. The decreased feed usage/head advantage imparted by the higher energy diets is not enough to compensate for their higher cost. However, this calculation does not recognize the contribution of other variables imparted by the higher energy diets (such as improved daily gains) to improved profitability.

If income over feed cost is calculated from these same figures a different conclusion is reached. This is due to the fact that this calculation also considers the economic benefit imparted by the higher daily gains (and hence market weights) experienced by pigs consuming the higher energy diets. As a result, this evaluation method identifies the high energy diet as the most cost-effective, with pigs on this diet having an income over feed cost advantage of $1.24/head compared to pigs consuming the low energy diet.

Evaluation of the economics of a nutrition program is an ongoing process and should be routinely revisited as input variables such as ingredient prices and market conditions (price, weights) change. For example, a decrease in market price of 10% applied to the example below will shift the optimum diet choice to one with the medium, rather than high, energy level. Income over feed cost is the most accurate method to ensure the most cost-effective nutrition program is consistently identified under all conditions.

Example:
Economics of Three Dietary Energy Levels for Genesus Pigs1

DIETARY ENERGY LEVEL 2

ITEM

LOW

MEDIUM

HIGH

Diet Cost, $/Tonne (ton)

334 (304)

349 (316)

365 (332)

Feed:Gain Ratio

2.9

2.8

2.7

Cost of gain, $/kg (lb.)

0.972 (0.441)

0.975 (0.442)

0.988 (0.448)

Daily Gain, g (lbs.)/day

839 (1.85)

862 (1.90)

885 (1.95)

Market Wt., kg (lbs.) 3

124 (273)

127 (279)

129 (285)

Revenue, $/head 4

177.45

181.35

185.25

Feed Cost, $/head

91.33

94.14

97.89

Income Over Feed Cost, $/head

86.12

87.21

87.36

1 Mixed Sex, 30 kg (65 lbs.) to market wt.
2 Net energy level increases of 100 kcal/kg (45.4 kcal/lb.) between each diet.
3 Assumes fixed time marketing cycle of 112 days.
4 Market price of $US 0.65/lb. live weight.