Economic comparison of group housing

© World Animal Protection / Emi Kondo

Case study

An economic comparison of group housing and individual sows stalls Authors: LEMME, C.F.; MAURO, P.A.; RIBAS, J.C.R.

There is a growing trend in the pig industry of phasing out individual sow stalls and a move towards group housing.

Legislation banning or phasing out sow stalls has come into force in the European Union, Canada, Australia, New Zealand and some North American states. This results from consumers’ demand for products that respect animal welfare.

Commission. However, pork producers and large food and fastfood companies are already anticipating these changes and preparing to make changes to their supply chains.

Image: Miunça Farm – Example of sow stalls

Image: ECO/BEA Farm – Example of group housing of sows

Fotos: Paulo Arthur Mauro (acervo pessoal)

In Brazil, the movement towards such legislation is still in its early stages - following the signing of the agreement in February 2013, of technical cooperation between the Brazilian Ministry of Agriculture, Livestock and Food Supply and the European

Several academic studies have assessed animal welfare and productivity in group housing of sows. However, there has been little research carried out in the Brazilian context to assess the real cost of transitioning from individual stalls to group housing of sows, into systems that improve animal welfare while maintaining financial performance and the impact of market pressures on profitability.

In order to answer these questions, this case study has been carried out with in collaboration with Miunça Farm, owned by Rubens Valentini, with the purpose of comparing the financial performance of two production systems: housing of sows in individual stalls and group housing of sows in pens.

The production sites Located in the State of Brasília, Miunça produces piglets that are sent to other farms for rearing and subsequently sent for slaughter. It has two production sites: the first, Miunça Farm, has been in operation for over 20 years and uses the conventional individual stalls to house its 2,150 sows. The second site, named ECO-BEA Farm, has been running since 2011 and houses 1,350 sows in an intermediate housing type, in which sows spend their first 42 days of gestation in individual stalls and the remaining in group housing with electronic sow feeding.

This intermediate model with 42 days spent in stalls has been cautiously implemented by Rubens Valentini when he first introduced group housing of sows, but studies carried out on his farm show that releasing sows into group pens immediately after insemination results in similar productivity levels.

The two production sites were built many years apart and therefore use different technology. The differences are detailed in the Table below.

Feeding

Thermal Comfort

Miunça FARM (sow stalls)

ECO-BEA FARM (group housing)

Manual feed distribution with pushcarts and placement into the troughs in all sheds.

Electronic sow feeding

Creep area for piglets equipped with heat lamps.

•Creep area for piglets equipped with thermal matting.

•Air blowers placed above the sows’ heads in the farrowing area.

The two sites have different productivity rates due to the different systems used to house the sows. The values below have been calculated with data from 2012 and 2013. It is important to note however that despite the two production sites being maintained in similar sanitary conditions and the transition from sow stalls to group housing being the biggest difference, there may be other factors which might impact productivity, such as the precision of the feeding system, improved thermal comfort or even different animal handling between the two sites.

Average rate for 2012-13

Miunça Farm

ECO-BEA Farm

% of litters/service

91.17%

92.75%

Number of live-born piglets/litter

13.76%

14.24%

Average piglet weight/ litter

19.33%

19.34%

Weaning weight/ live-born piglet

5.02%

5.74%

* Statistical tests have not been performed to verify the differences

Economic analysis methodology The Discounted Cash Flow method was used to carry out an economic analysis of the two production sites. This is the most suitable method for evaluating companies and projects that have their value coming from the operation and don’t have similar companies and projects with available evaluation to compare them with.

The method consists in determining the company’s value through the projection of its cash flows for all the years of production and investment, as shown below.

Year example Gross revenue

120,000

(-) Revenue taxes

(18,000)

(-) Costs

(48,000)

(-) Expenses (including depreciation)

(24,000)

= Earnings before interest and income tax (EBIT)

30,000

(-) Income tax / national insurance contribution on EBIT (34%)

(10,200)

= Net operating profit after tax (NOPAT)

19,800

(+) Depreciation

5,500

(-) Investment

(5,000)

(-) Changes in working capital

(2,100)

=Company’s Operating Free Cash Flow (OFCF)

18,200

Source: adapted from Martelanc, Pasin and Pereira (2010)

From the projection of the operating free cash flow (OFCF), we were able to calculate the company’s NPV (Net Present Value), the IRR (Internal Rate of Return) and the investment’s Payback Period (PB). The NPV represents the company’s monetary value today, considering the need for invested capital and the existing uncertainty in future cash flows.

Therefore, future values are discounted for current value at an interest rate compatible with the business risk. The IRR may be understood as the interest rate that the project yields – in case the money is invested. The Payback Period informs the period of time (in this case years) needed to recover the invested capital, without considering the value of money over time. The three indicators are complementary.

Despite the greater investment per sow in the ECO-BEA Farm resulting from the electronic sow feeding, this is compensated by higher productivity and lower labour costs per sow, resulting in higher EBIT (Earnings Before Interest & Tax) per animal. Therefore the initial investment is recovered via higher cash flow gains in subsequent years once the unit is established. It is important to notice that even in the case of mechanization of the feed distribution process in the Miunça Farm, it would reduce direct labour costs, but not enough to alter the comparative results.

For a more in-depth understanding of the Discounted Cash Flow method, we recommend reading the book included in the References section.

Summary

Miunça Farm ECO-BEA Farm

Number of sows

2,150

Applying the method at the Miunça Farm and ECO-BEA Farm

Investment/sow (excluding BRL 2,169.82 investment in breeding stock)

BRL 2,996.36

The cash flow projections at Miunça and ECOBEA farms have been performed with the assistance of the farm’s owner and managers. It is important to highlight that the two production sites share some resources, including farm management.

Therefore, some costs were differently apportioned and some were equally divided between the two sites. It is understood that the equally divided costs penalize the ECO-BEA farm’s evaluation, given that this site has a smaller number of sows.

Furthermore, the final financial results may not be exact because the value of some items was estimated. However, similar estimates were made for both units so this won’t impact on the comparison between sites.

Gross revenue/sow

BRL 2,885.87

BRL 3,363.24

Earnings Before Interest and Tax (EBIT)/sow

BRL 926.12

BRL 1,177.48

Cost and expenditure with direct Labour/sow

BRL 377.96

BRL 260.86

Operating Free Cash Flow BRL 286.30 (OFCF)/sow

BRL 452.72

Regarding projection deadline, we choose perpetuity given the long-term perspective for this type of investment. The real discount rate used was 8% p.a. to represent the business risk associated with pig production. This value was estimated based on the profitability of Treasury bonds and the market risk of the major companies operating in this sector.

Results of the case study The production site using group sow housing resulted in better financial performance compared to the site using conventional sow stalls as shown in the Table below.

Financial evaluation

Miunça Farm

ECO-BEA Farm

Net Present Value (NPV) (i=8% p.a.)

BRL 1,001,224.47

BRL 2,000,280.77

Internal Rate 9.2% of Return (IRR)

11.2%

Payback Period (PB)

9.9 years

11.77 years

1,280

In additional to the calculation of the basic scenario, two sensitivity tests were carried out: one related to ECO-BEA Farm’s productivity and the other to the exchange rate. In this Case Study, the financial performance of both sites is directly related to their productivity rates. There is a margin of 5% in the productivity of ECO-BEA Farm. That means that even if the productivity rate decreases down to that level, its financial performance still exceeds that of Miunça farm.

Regarding the exchange rate, it is assumed that producers may be reluctant to invest in Electronic Sow Feeding, given that they are imported and their price depends on the US Dollar exchange rate. There are other values in the calculations that also depend on the US Dollar, such as the price of corn and soy. However, feeding machines are a factor of differentiation, and for this reason a sensitivity analysis was carried out. At the date of the budget used in the free cash flow projections, the US Dollar exchange rate (R$/US$) was 2.27. As with the margin of productivity, there is a margin in exchange rate.

Up to an exchange rate of 6.25 (R$/US$).the financial performance of ECO-BEA Farm still exceeds that of Miunça Farm.

One may question whether ECO-BEA Farm’s better financial performance is the exclusive result of a more modern housing system. In order to rest this question, we calculated in addition to the financial performance, the costs associated

with the live-born piglets in both farms. The results show slightly advantageous costs per live-born piglet for ECO-BEA

Category

Cost item

Farm, which puts the group housing system at least on an equal footing with the conventional individual sow stalls.

Miunça Farm

Feed Consumables

Staff Breeding stock

BRL 1,279,260.88

Medication and vaccines

BRL 1,399,058.98

Ear-tags

BRL 73,169.54 BRL 3,096.00

Insemination (AI) materials

BRL 43,532.55

Direct Labour for Gestation BRL 259,216.59

BRL 259,216.59

Boars

BRL 52,318.68

Sows

BRL 698,612.18

Buildings Investment depreciation

ECO-BEA Farm

Control equipment Feeding equipment

BRL 646,293.50

BRL 830,822.29 BRL 922,142.00

Housing equipment

R$ BRL 8,520.00

BRL 17,952.00 BRL 25,362.45

BRL 80,347.59 BRL 415,251.40

BRL 62,208.00 BRL 112,060.00

BRL 48,005.27

BRL 80,347.59 BRL 30,481.32 BRL 384,770.08 BRL 39,680.00

BRL 87,063.68

BRL 41,332.00

BRL 4,979.42 BRL 32,070.92 BRL 10,333.33

Total

BRL 2,468,947.74

BRL 1,504,804.68

Live-born piglets Cost/ live-born piglet

72,145

44,231

BRL 34.22

BRL 34.02

*Only costs that generate major differentiation between production systems have been considered in the calculation. Costs with vehicles, for example, have not been apportioned for the breeding and farrowing areas, and are not included in the calculation

Conclusions • Group housing of sows results in better financial performance compared to individual sow stalls.

• The market pressure pushing production towards methods that consider animal welfare requires changes from producers, but that change does not have to lead to a drop in profitability.

• It is recommended that producers have appropriate financial control on their farms and that they perform the comparative analysis according to their farm conditions.

Reference MARTELANC, Roy; PASIN, Rodrigo; e PEREIRA, Fernando. Avaliação de empresas: um guia para fusões & aquisições e private equity. São Paulo: Pearson Prentice Hall, 2010.

Acknowledgements Our sincere thanks to Rubens Valentini for access to Miunça Farm and ECO-BEA Farm to complete this case study; PhD student Julia Eumira Gomes Neves, from the UnB, for providing information from her thesis; Masters student Paulo Arthur and Prof. Dr Celso Funcia Lemme, from the Coopead Institute/UFRJ, for providing information from unpublished investigation.

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