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Virgin Islands Agricultural Experiment Station Report No. 6 August 1974 Profitability of HOG PRODUCTION in the U.S. Virgin Islands —) a = a —_— hi = T — - View! i Palade. oj PP Po vr i met. | hs it” ny i ig a al t/ i ii _ ee a ne a ct ah iF Wh, at > . lew oN s Fa is of P ab oe “Beh = == a ba = = — i* =, c28 a Fis sli \ VIRGIN ISLANDS AGRICULTURAL EXPERIMENT STATION Fenton B. Sands, Director St. Croix, U.S. Virgin Islands Virgin Islands Agricultural Experiment Station Report No. 6 August 1974 Profitability of HOG PRODUCTION In the U.S. Virgin Islands College of the Virgin Islands Virgin Islands Agricultural Experiment Station Fenton B. Sands, Director St. Croix, U.S. Virgin Islands CONTENTS y Ls a Foreword Summary and Conclusions The Present Situation Demand Feeding Programs Buildings and Equipment Efficiency The Models =x Feeding Programs Seigypmiaraten: Drylot Requirements Buildings and Equipment Variable and Fixed Costs Sale Weights Analysis of Models Sensitivity Analysis Returns to Owner's Labor and Management Per Unit Costs and Returns Breakeven” Analysis Internal Rate of Return A 50-Sow Commercial Operation Appendix Ke Desa oF f O NN NN NSN ee = «A = iv FOREWORD This report, “Profitability of Hog Production in the U.S. Virgin Islands,” is one of a series of feasibility studies sponsored by the newly created Virgin Islands Agricultural Experiment Sta- tion, College of the Virgin Islands. These investigations were financed totally with Federal funds made available to the Station under the provisions of the Hatch Act, Amended. Preparation of this report was accomplished by contracting for the services of the following team of specialists: Dr. Farrell E. Jensen, Assistant Professor, Department of Agricultural Ec- onomics and Marketing, Rutgers University, New Brunswick, N.J. and Dr, Robert L. Park, Professor of Animal Science, Brigham Young University, Provo, Utah, This team conducted the study and wrote the manuscript for this report. The objective of these studies was to try to determine the agricultural enterprises both plant and animal, that have economic potential on the Virgin Islands. It is my belief that the agricul- tural industry must be economically sound in order to be viable. On the Virgin Islands, agriculture has been on the decline since the carly part of the 1960's. The average number of farms, fanners, and production of agricultural commodities (with the exception of fluid milk) have all declined at a consistent rate. Among the questions which are uppermost in the minds of many people are: What factors have been responsible for these de- clines? Can these downward trends be stopped and perhaps reversed? What is the future of the avricultural industry, particularly on St. Croix where 85 percent of the farmland is located? This report on the profitability of hog preduction, along with the others, sheds some light on these questions. These feasibility reports have also revealed the areas where lack of training and education on the part of the farmers has adversely affected production. These subjects have now be- come part of the new program of the VI. Extension Service. At the same time, the lack of infor- mation about the response of crops and livestock in this environment, which also limits produc- tion, has been recognived. These gaps in our knowledge have become the basis for the planned research program of the V.L Agricultural Experiment Station. Thus, these studies have given more direction to the efforts of the Extension and research programs of this land-grant institu- tion. More importantly, the results of these studies are expected to be beneficial to full- and part-time farmers, as well as to potential investors. This series of reports rests squarely on the belief that a revival of agriculture would con- tribute substantially to the general welfare through increased output of goods and services and by providing additional employment. Moreover, expanded production and marketing of farm products could provide greater, and in some cases cheaper, sources of nutritious foods for consumers. A more fully developed agnculture would complement the major industrv—tourism—in two wavs. First, visitors would be pleased to be served local products, especially tropical [ruits and vegetables, by hotels and restaurants where such products are often mot now available. Sec- ond—and perhaps more important—an expanded agriculture would tend to preserve the en- vironment of exotic tropical islands. Most visitors and some permanent and semi-permanent residents come to the Virgin Islands to seek this environment. Lf this attraction is destrovecl, the basis of the major industry of the Islands will be undennined. The Virgin Islands Agricultural Experiment Station gratefully acknowledges the cooperative assistance and contributions from many St. Croix farmers: Rudolph Shulterbrandt, Gommission- er, V.1. Department of Agriculture, and his staff; and Bennett S. White, Jr., project consult- ant and fonner USDA agricultural economist, now retired. Fenton B. Sands, Director March 1974 SUMMARY AND CONCLUSIONS The hog industry on St. Croix 1s small—both in overall sive and scale of individual operation— and has been in a state of decline in recent years. Individual production units are typically herds of 9 to 10 sows operated on a part-time basis. In 1970 there were 61 Virgin Islands farms pro- ducing hogs. Between 1964 and 1970 the hog population declined by nearly a third to 898 animals, and numbers sold decreased from 622 to 430—a drop of 30.9 percent. Much of the demand for pork is for 40 to 60 pound animals for roasting; this demand peaks at Christmas time. An intermediate market also exists for pigs [rom roasting weight up to approx- imately 125 pounds. There is a limited demand for heavier hogs (over 125 pounds) and these are usually sold on a cut-and-yield basis. Carcass prices range from $.75 to $1.00 per pound; $.85 per pound is typical. Livewcight prices range from $.50 to $.70 per pound. Under present conditions, the future for the hog industry on St. Croix is uncertain. The two major problems are high feed costs and sub- standard management practices. Feed costs are hich largely because of transpor- tation rates; shipping charges exceed $50 per ton for feeds originating in the U.S. mainland. Farmers have insufficient management skills to operate efficient units. Many hog enterprises are characterized by slow gains and high death losses. Too many pigs are lost between the time of birth and market age. Most hogs do not get enough proper feed for satisfactory growth, The demand for 220-pound hogs is unstable. Butchers often discount the heavy hoes because the market prefers lean meat. ‘The average size of hogs slaughtered in 1972 was approximately 108 pounds. As a basis for analysis of factors affecting costs, returns, ancl profitability, a model was developed featuring an &-sow part-time operation. ‘This size was selected because it represents the operation of a majority of island producers. The analysis as- sumes proper management practices which gfen- erally do not prevail at present. To cover all costs except the owner's part-time labor, 66-pound pigs must sell for $.79 per pound; 132-pound pigs at $.56 per pound: and 220-pound animals at $.50 per pound when feed prices are $9.00 per cwt—which approximates the July 1973 situation when this study was made. A major problem for farmers serving the roasting pig mar- ket (40-100 lbs.) is that local prices do not re- flect the differences in the costs of production. Production costs per pound are greater for light pigs, but generaly there are no price differentials in the market for this weight range. The model shows that heavier hogs are more profitable under present price conditions. However, buyer prefer- ence for lighter weights likely would lead to price discounts for heavier animals if larger numbers were produced. For 132-pound pigs, the costs per pound of gain excluding manager’s labor was $.45 per pound at $7.50/ewt. feed price. The internal rate of return for the model with 132-pound pigs, $7.50/ewt. feed price and $60 per pound liveweight price was equal to 0.9 per- cent—which is not an attractive investment. Tt is doubtful that a full-time operation with the necessary investment in facilities and relying on commercial feed at present prices would be profitable. This tvpe of operation would be more capital intensive than the 8-sow model which did not provide a satisfactory return to a_ limited amount of invested capital. If the decline in the hog industry is to be re- versed, the importance of lowering feed costs and improving wianagement cannot be overempha- sized. The success of research efforts to reduce feed costs through providing the basis for much larger supplics of locally grown sorghum for grain and development of local feed processing are critical to the future of the hog industry. Qn every hand, there is evidence that produc- ers could do a better job with the resources they are now utilizing. An educational program 1s needed to provide more information about feeding programs, equipment and facilities, and proper sanitation and medication practices. The model used in this analysis assumed com- plete reliance on commercial feed. More than one- half of the producers ai present are feeding gar- bage to reduce feed costs, and as a result they have been able to stay in business. These rowers v If costs of purchased feed can be reduced sig- would benefit from some information about a bal- nificantly and if vigorous extension efforts suc- anced garbage feeding program. A balanced diet would improve the rate of grain of their animals. ceed in inducing vrowers to improve management to levels that are clearly attainable, hog produc- When farmers bargain over prices with buyers, tion could be a viable part-time enterprise in the they should be aware of the higher cost of pro- ducing roasting pigs. Virgin Islands. vi PROFITABILITY OF HOG PRODUCTION in the U.S. Virgin Islands hy FARRELL E. JENSEN and ROBERT L. PARK The hog industry on St. Croix is characterized primarily by small herds of 7 to 10 sows operated on a part-time basis. In 1970, 61 Virgin Islands farms were producing hogs. From 1964 to 1970, the hog population declined by 32.2 percent to 898 animals. Over the same period, the total num- ber of hogs sold decreased from 622 to 450—a drop of 30.9 percent (Table 1). Table 1.—Statistical summary of Virgin Islands hog numbers and production by size of farm, 1964, & 1970. Year Percent Desermption 1 Std 1o/0 change Number of farms with hogs Number Percent Under 3 acres 2 19 —34.5 3 to 9 acres bo 18 —73.9 lO te 49 acres 3 Ih —62.5 90 to 99 acres 0 7} — 30.0 100 to 500 acres 1a Ml —bb.; Over O00 acres 1 __ TOTAL 159 61 —61.6 Number of hogs on farms Under 5 acres 316 151 —52.2 3 to 9 acres a10) 166 —67.5 10 to 49 acres 182 344 89.0 Sl) te 99 acres l3a7 0) — 34.5 100 to 500 acres l7o }o4 —249.1 Over 500 acres % 23 666.7 TOTAL 1,323 HOB —§$2.2 Number of hogs soled Under 3) acres 134 76 —43.3 3 to D acres 208 +1 — 0.5 10 to 49 acres 7 186 177.6 50 to 99 acres 168 62 —63.] 100 to 500 acres 45 63 40.0 Over 200 acres — 9 —_ TOTAL 622 450 30.4 Source: 1969 Census of Agriculture, U. 5. Department of Commerce, Bureau of Census, 1972. The objectives of the hog study were to (1) identify and define a typical benchmark pro- duction unit appropriate to the Virgin Islands, (2) determine the costs and returns to the pro- duction unit, (3) determine the breakeven points under changing conditions, anc (4) calculate the internal rate of return as a standard for assessing feasibility. Interviews were conducted with local farmers to obtain relevant production information, Addi- tional information was obtained from local busi- nessmen and other sources. The analysis assumes higher levels of efficiency than presently exist in the operations. With proper management prac- tices, however, the standards can be achieved under Virgin Islands conditions, THE PRESENT SITUATION Demand The demand for pork appears to be relatively unstable: peak demand occurs at Christmas time when 40-60 pound hogs are sold for roasting and barbecuing. A majority of the producers inter- viewed for the study sald most of their pigs for roasting, An intermediate market also exists for pigs from roasting weight up to approximately 125 pounds. Local butchers purchase most of the intermediate weight hows. The local demand for hogs heavier than 125 pounds appears to be lim- ited because lighter weight animals are preferred. The heavy hogs (over 125 pounds) are usually sold on a cut-and-yield basis; that is, total value is determined after the hog is dressed and the fat is trimmed from the carcass. Animals are sold on both a liveweight and dressed weight basis, but dressed weight prices were most cammonly reported. Carcass prices ranged from $.75 to $1.00 per pound; the majority i were around $.85. These correspond with live- weight prices ranging from approximately $.50 to $.70 per pound, The same carcass prices generally apply over all weight ranges. Feeding Programs Six of the nine farmers who were interviewed fel waste food products supplemented by a com- plete commercial ration, The waste food 1s col- lected from hotels, restaurants and in some in- stances from homes. One producer used waste products exclusively, while the others purchased their commercial feed from Puerto Rican firms. High commercial feed prices and insufficient knowledge of vood feeding and management prac- tices hamper the industry. Buildings and Equipment Most of the structures have been made from used lumber and tin. ‘The facilities are generally inadequate for a successful enterprise. The most serious problem is the lack of suitable facilities for farrowing and handling baby pigs. A large number of baby pigs are lost as a result. Out of 9 farmers interview, 5 sold less than 4+ pigs per litter and 2 operators sold less than 2 pigs per litter. Equipment is limited and consists of a few barrels, buckets. and improvised waterers and feeders. The operations are mostly drylot. Efficiency Feed conversion and rates of gain could be im- proved. In many instances, pigs 4-5 months of age weigh only 10-50 pounds. Under proper feed- ing and tuanagernment programs, a hog should weigh 125-150 pounds at + months, The slow growth rates are a result of a combination of fac- tors including insufficient amounts of feed and essential nutrients, Other problems the study team noted were thievery, some instances of hogs being attacked by dogs, and a need for management knowledge. THE MODELS The model selected’ for the analysis was an 8-sow part-time operation, because this sive repre- sented that of the majority of island producers. The analysis assumes proper management prac- tices and the following factors: 1, Owner supplies all labor except for two weeks, 2. The operation has 8 sows and 2 gilts for breeding stock. 3. Gilts are bred at 8 months; sows farrow twice each year. 4. Each sow has four litters before culling. Sows weigh 400 pounds at time of sale. Replace- ment cilts are taken from the litters. 5, Seven pigs are weaned from each litter. This should be a minimum standard. 6. Operator builds his own buildings and in- stalls his equipment. 7. Feed conversion is one standard deviation below the National Research Council Standads average. &. A death loss of 2 percent is assumed for pigs under 66 pounds, and an additional | per- cent for those over 66 pounds. These estimates are in addition to the usual losses in the U.S, mainlanel, Feeding Program The feeding prograin is based on a total comi- mnercial ration to deteniine the feasibility of such an operation, Table 2 shows the averave pounds of feed required per day, the number of days on feed ancl the total pounds of feed per sow and hog at various sizes. These conversion rates should be attainable in commercial operations. A sow is assumed to consume 1,127 pounds of feed be- tween litters. Market hogs require 853 pounds of feed to reach a weight of 220 pounds. Drylot Rquirements A drvlot program was used for the model to keep the investment in facilities to a minimum. The space requirements are shown in Table 3. Buildings and Equipment Estimated costs for buildings and equipment are shown in Table +. Costs for the construction materials were obtained from a local lumber com- pany. Amounts of materials necessary for the fa- cilities were then estimated to arrive at the cost figures. The cost estimates do net include a labor charge, as it is assumed that the owner will do the construction. All buildings have a wood super- structure, concrete floors and galvanized roofs. The farrowing facility has a concrete floor with 3'%-foot block walls to protect the baby pigs from the weather. Four farrowing stalls are included. The equipment includes heat lamps for the baby Table 2.—Assumptions for feeding program for hog enterprise, St. Croix, Virgin Islands, 1973. Feed requirements Stage Average of Unit pounds Number Total production af feed of pounds per day days Sow Pounds Number Pounds Breeding Per litter 7.0 a) 245) Gestation Per litter 4.0 72 2A Prefarrowing = Per litter 6.0 2 | 126 Lactation Per litter 10.0 42 420) Other Per litter +.0 12 48 TOTAL — 182 1127 Fintshing pigs Birth to 22 Ihs. Per pig 1.3 42 a 25-66 Ibs. Per pig 3.3 45 142 67-132 lbs. Per pig 5.9 40 236 193-220 Ibs. Per pig 8.4 a0 420 TOTAL 175 853 Gill Pre-breeding Per gilt | 60 420 Table 3.—Assumptions for determining drylot space requirements for hog enterprise, St, Croix, Virgin Islands, 1973 Type Space requirement o Funetion per antmal unit (sq. ft.) Sow facility Feeding 150 Shade 30 Finishing Pigs under 100 pounds Feeding 73 Shade 7 Pigs over 100) pounds Feeding TOO Shade 10 Boars Feeding 200 Shade 30 pigs. Baby pigs are to be left with sows until weaned at 8-wecks of age. The nursery-growing fenced enclosure with a concrete slab under the shade. Three sides are made of hog wire and the fourth from chain link fencing. The same con- struction for the fencing and shade was also used for the finishing and gestation facilities with one exception: the gestation facility has two strands of barbed wire around the hog wire perimeter for extra strength, One-fourth of the cost of a pickup truck was prorated to the hog enterprise. Depreciation 1s charged over eight years, Miscellaneous costs in- clude the installation of mist sprayers in each of the facilities to cool the animals. facility consists of a Variable and Fixed Costs Table 5 contains a list of all variable costs ex- cept for feed costs and death losses. The price of feed and the death losses were handled as variables and will be discussed at a later point in Table 4—Estimated purchase cost and depreciation schedule for buildings and equipment, hog enter- prise, St. Croix, Virgin Islands, 1973 Estt- Esti- Annual Ltem mated mated depre- cost life clafion Farrowing facility Dollars Years Dollars Building 700 10 70 Equipment 400 10 40) Nursery-growing facility Fence 270 5 54 Shade 160 10) 16 Water cup 50 10 5 Finishing facility Fence 250) 4 of) Shade 230 10 23 Water cup 50) 10 5 Gestation facility Fence 210 fF) 42 Shade 330 10 33 Water cup a) 10) 2 Pickup truck 1,123° 8 140 Miscellaneous 300 10 30 TOTAL 4,125 313 ‘Share for hog enterprise. Table 5.—Partial listing of assumptions for variable and fixed costs calculations, hog enterprise, St. Croix, Virgin Islands, 1973 Cast Total Cost wem per annual Initer cost Variable Dollari_.. Breeding charge’ — — Veterinary Medication and sanitation 10.50 168 Hired labor 3.00 90 Building and fence repairs 2.00 2 Equipment repairs a 12 Utilities 2.75 44 ‘Truck, fuel, tires and maintenance* — 6.50 14 Marketing’ 4,25 84 Miscellancous 5.30 56 Fixed Property taxes* Insurance —- 1U Truck" 70 Building and equipment’® at) Depreciation’ Building, fences and equipment -- 313 Interest on investment Buildings and equipment f@ 7.4% ° = — 130 Lund (@) 7.9% . 130 Livestock (@ 7.5%" — 200 TOTAL [735 ‘Assume that sows are serviced by breeding stock owned by Virgin Islands Department of Awriculture, > Assume truck is driven 3.000 miles at 3.0) cents per mile. Estimate includes depreciation, and insurarce. "Assume that owner pays for processing 6.100 pounds through slaughterhouse at | cent per pound, “According to the tax assessor, land and buildings are assessed at 60% of appraised value. The tax rate is 144% of assessed value. Agricultural tax liability is 95% of amount determined by applying tax rate to as- sessed value. ‘Vhe hog operation requires | acre of land at $2,000. The value of buildings and equipment 1 $3,000, "Insurance estimate from local company was $270 per year for liability and collision coverage of which 29% is charged to hog enterprise. *Fire and extended coverage rates for wooden frame farm buildings oltained from local insurance company are $1.75 per S100, See Table 4. *See Table 4. "Breeding stock value is assumed to be $250 per head. Assume an average investment of $1200 in feeder and finishing hoes, 4 the analysis. Assumptions underlying the cost factors are specified in the footnotes. Estimates were obtained from resources whenever possible. Only a minimal amount of hired labor was charged to the operation, as the operator should be able to handle the workload on a part-time basis. Interest on the investment in land, build- ings, equipment and livestock was charged at 71/2 percent per year. This represents the opportunity cost of capital investment in the enterprise and does not represent an interest figure paid to a lending institution. The total of the listed fixed and variable costs excluding feed and death losses is $1,733 per year. local Sale Weights Models for three market weights were devel- oped. The 66-pound hogs are assumed to meet the needs of the roasting pie market and the 132-pound hogs are for the intermediate weight market. A model for 220-pound pigs is also in- cluded. The model assumes no price differentials for the alternative market weights, ANALYSIS OF MODELS Returns to Labor and Management Equations The first stage of the analysis was to determine the returns to owner's labor and management after subtracting all costs including interest on invest- ment (opportunity costs). This figure indicates the annual income that the owner could generate from the enterprise. The following equations were developed for each market weieht model; ' |. 66-pound market: R, = +t W,P, (3.92 N,— 1) — 3396.96 PN, — 22336P, + 1600P,— 1732.96 ?.—132-pound market: ma EW, P, (3-92N,-1) 7105.12 PN, —21392P, + 1600P — 1732.96 R 4.—2?0-pound market: R,,, —tW, P,, (3-92 8,— 1) — 13623 PN, : —19712P, + 1600P_— 1732.96 ‘See Appendix, section | for derivation. Where: Rim—Annual dollar returns to owner's labor and management. W,=Weight of market hogs in pounds. P,,= Price of market hogs per pound. N;y= Number of pigs weaned per litter. P,—Price of hog and sow feed per pound (not per hundred weight). ‘Vhe last figure on the right can be rounded off to $1,733 and represents the variable and fixed costs contained in Table 5, An advantage of the equations is that an operator can use his own fhg- ures for any of these variables and calculate the returns to labor and mianavenent. Sensitivity Analysis For the sensitivity analysis, three values for the price of feed, market weight and farm hve- weight price were assumed (‘Table 6). The feed price assumptions range from $6 to $9 per ewt. The present price in effect is approximated by the highest price; the lowest figure approximates what might be the lowest possible price of feed on the island under the present) transportation Table 6.—Value ranges for variables included in sensitivity analysis, hog enterprise, St. Croix, Virgin Islands, 1973. Range Marable eee ess | 2 a Price of feed per ewt.' Hog and sew ration- $6.00 87.50 $9.00 Market liveweight in pounds 66 a2 2) Farm liveweight price /pound* 66 Pounds $50 § 60 § .65 132 Pounds 40 60 70) 220 Pounds 0) .60 70) Sows 25 23 Be ‘Loreal shipping company quoted a rate of $2.62 per ewt. to ship feed from Florida, * For cost analysis, the cost of pig starter is assumed to be 1.33 times the cost of hoe and sow ration, This is the price relationship that existed on price list of a local feed supplier. "Dressing percentages are 74% for 66-pound pigs, 71% for 132-pound pigs and 70% for 220-pound pigs. Prices listed here cover range of prices received hy farmers, rate structures. he cost of shipping grain from Florida is $2.62 per ewt. or $52.40 per ton. Tf this is added to the price of feed in the U.S. main- land (prior to the June 1973 high price period) then $6.00/cwt. appears to be the best possible feed price for hoy pellets or mash. Liveweight prices vary from $.50 to $.65 per pound—the most common being $.60 per pound. The returns to owner's labor and management from all possible combinations of the variables are shown in Table 7, A relationship demon- strated in the table is that the owner's return in dollars increases with the market weight of the hogs. At $6.00 feed costs, all combinations of weight, liveweight prices (except the $.50. live- weight price in 66-pound class) had a positive return although the amounts were less for the smallest market weight hogs. At both $7.50 and $9.00 feed costs, only the heaviest weight classes had positive returns. At the highest feed costs, liveweight prices had to be $.60 and $.65 per pound to provide a positive re- turn for the owner's time. intermediate and In the bottom section of the table, a charge was calculated for the value of the owner's labor and management and this hgure was included in the costs. ‘lo cover all casts, the figures in the table should be zero or vreater. However, most of them are negative which indicates that the enterprise was not covering all costs, With $6.00 feed prices, there is opportunity for sellimg 132- and 220-pound hogs. At $7.50 feed costs, the only profits are for 132-pound hogs at $.65 per pound or 220-pounders at $.60 and $.65° per pound. At prices approximating the present situa- tion, only the 220-pound hogs at $.65 per pound covered all costs. However, as previously stated, the market for the heavy hogs is unstable. Returns to OQwner’s Labor and Management Complete breakdowns of the sales and costs for the three footnoted returns in Table 7 are shown in Table 8. These are labeled as alternatives A, Band C. Alternative A is for 132-pound hogs, $7.50 feed prices and $.60 per pound liveweight prices, Alternative B is the same, except that feed prices are $9.00 per cw. For alternative C, feed prices are $9.00 and liveweight prices are $.90 per > Table 7..—Sensitivity analysis to measure impact of charges in variables on returns to owner's management and labor and net returns after all costs, hog enterprise, St. Croix, U.S. Virgin Islands, 1973 : 66-pound hogs 132-pound hogs 220-pound hogs Price of hag and sow feed Selling at a liveweight Selling at a liveweight Selling at a liveweight per cw. price per pound of; price per pound of: price per pound of: wa 60 65 0 60 65 50 60 65 oe Dollar returns to owner's management and labor____. oe $6.00 —610 8 437 1,380 2,776 5,474 4396 3,725 6,886 7.50 — 1,301 — 605 —254 313 1,709" 2.407 1,670 3,997 9,160 9.00 1.995 —1,295 —946 —754' 642" 1,340 —56 2,271 4,434 Wo ee Net dollar returns after all costs’... __~ Se 6.00 — 2,456 — 1,756 —|,409 —773 625 1521 959 4,262 4,425 7.00) —3,147 —2 445 —? 100 — 1,840 —444 254 —79! 1,536 2,699 9.00 —5 859 —3.141 —?,792 —2,907 —1,511 —A13 —3 517 ~ 19) 973 — 'See Table # for total breakdown of sales and cost item Be Table §&—Returns to labor and management for hog enterprise, St. Croix, Virgin Islands, 1973 item Alternative A‘ Alterantipe BR Alternative GC" Rafe iti i a ik Dollars______- Market hogs (132 pounds) 8,376 4,376 6.9480 Cull sows 400 400 400 (cross sales $776 4.776 7 389 Variable costs Commercial feed odd 6,40) 6,401 Hired labor 90 90 90) Veterinary, medication and sanitation 168 hits: 164 Building and fence repairs ua a2 32 Equipment repairs I2 12 12 Truck fuel, maintenance 104 104 104 Utilities 44 44 44 Marketing 84 Ht ue Miscellaneous 56 a6 96 Total variable costs 5,924 6,991 6,991 Fixed costs Depreciation on bldgs., fences, equipment 513 513 a13 Property taxes 10 10 10 Insurance 120 120 140 Total fixed costs 645 643 645 Interest on investment 500 900 500 Total costs 7,067 8.134 8,154 Returns to labor and management 1,709 642 —Ti4t ' Based on assumption of feed price of $7.90 per ewt, und a market price of $.60 per pound liveweight. * Based on assumption of feed price of $9.00 per cwt. and a market price of $.60 per pound liveweight, Most closely approximates present situation on island {June 17%). * Based on assumption of feed price of $9.00 per ewt. and a market price of $.50 per pound liveweight. 6 pound, The returns are the same as shown in the previous table. Per Unit Costs and Returns Table 9 contains a breakdown of the costs and returns on a per-unit basis. The total costs per hog sold including the owner’s labor are $64.40, $74.12 and $74.12 for the three alternatives. At a feed price of $7.50 per cwt., feed costs per hog total $48.60; they amount to $58.32 at a $9.00 per cwt. feed price, Costs per pound range from $.454 to $.522. Returns to labor and management per hog sold are $15.58, $5.85 and — $6.87 for the three alternatives. Breakeven Analysis Feed costs are the largest cost component in the model. Breakeven equations were determined to find the relationship of feed prices and farm meat prices for the producer. to breakeven. At the breakeven points, all costs are covered except the owner's labor, The equations are: * 1.—66-pound market: 1332.96 + 461.15 PY ™m 06 105.76 W, 2.—132—pound market: 1332.96 + 711.28 PY P — m,c.132 105.76 W, *See Appendix, section 2? for derivation, Table 9.—Summary of per unit costs and returns for 132-pound hogs for hog enterprise, St. Croix, Virgin Islands, 1973 (Includes manager's labor) Alternative Item a a ek A B Cc Number of pigs weaned per year 112 112 M12 Number of hogs sold per year Market hogs 105.76 105,76 105.76 Sows 4 nm 4 TOTAL 109.76 109.76 109.76 Number of pounds sold per year Market hogs 13,960 13,960 13,960 Sows 1,600 1,600 1,600 Value per animal sold Market hogs $ 79.20 $ 79.20 $ 66.00 Sows 100.00 100.00 100,00 Costs per hog sold Variable (excluding feed & manager's labor) $ 5.38 $ 5.38 $ 5.38 Fixed 5.86 5.86 5.86 Interest on investment 4.56 4.56 4.56 Feed costs 45.60 58.52 ot2 TOTAL $ 64.40 $ 74.12 $ 74.12 Costs per pound sold Variable $ 86.038 $ .038 $ 86.038 Fixed 041 04] 041 Interest on investment 0392 032 032 Feed costs 43 411 411 Total cost per pound sold $ 6.454 $ 522 $ «22 Returns to labor and management Per hog sold $ 15.58 5.85 —6.87 Per pound sold 110 O41 —.048 7 3.—220-pound market: 1332.96 + 1150.77 PY P = m,¢,220 105.76 W, P =Breakeven liveweight price m W, = Weight of market hogs in pounds P’,=Feed prices per hundredweight. Figure 1 shows the relationship between the two prices for each of the three market weight models. The fact that farmers must receive a higher price per pound for small pigs is evident in the chart. To break even (all costs except owner's labor and management) at $9.00 per ewt. feed prices, the farmer must receive $.50 per pound for 220-pound hogs, $.56 for 132-pound hogs and $.79 for 66-pound hogs. The present market pricing system (1973) does not reflect these cost differences. Any other feed price and meat price relationship can be determined in the same manner. The equivalent carcass price is on the right vertical axis. ‘l'able 10 shows the rela- tionship between a scries of liveweight and equiva- lent carcass price relationships. Internal Rate of Return The internal rate of return (IRR) is defined as that discount rate which equates the stream of cash benefits and the stream of cash over the planning horizon. If the internal rate of return 1s above the rate for alternative uses for capital, then the investment should be considered after com- pensation for risk. If the internal rate of return ts below alternative uses, the investment is not feasible. To determine the internal rate of return, it 1s necessary to estimate the amount of cash generated each year. Non-cash items like depreciation are not included as costs. Since the IRR represents a return to capital, a charge for the owner's management and labor was included (Table 11). After deducting $2,153 for the owner’s salary, the alternative A model generated $569 in cash, The other alternatives were cash deficit each year after the owner's salary withdrawal. ‘Table 12 shows the 20-year budget used to calculate the net benefits 51.00 - 1.38 PO 41.34 60 F yl. FoF 78 ? z 5 a 40 F mee | 3 : 70 t i] a rf < F] A ao Fk 4 5d 2 Pr ; g - 30h iy a | 3 7 28 Le Per | i i i ii i. i. rs $1.00 400 500 400 7.00 6.00 9.00 10.00 11.00 12.00 Price of heey feed per owt. Figure 1.—Breakeven relationship between price of feed per ewl. and liveweight and carcass weight per pound, hog enterprise, St. Croix, U.S. Virgin Islands, 1973. Note that on any point on the lines, the owner would cover all costs except his manage- ment and labor. Table 10.—Equivalent carcass and liveweight prices per pound at a 72 percent careass-to-liveweight ratio Price per pound Price per pound Live a iercate Carcass Live $ .10 $ .14 & 0 $ .14 20 28 30 22 30) 42 40 29 40 56 40 6 50 69 60 AS 60 AS 0 A) 70 7 -80 it 80 hdl 0 05 90 1.25 1.00) 72 1.00 1.39 1.10 79 1.20 6 1.30 94 140 1.01 1.50 1.08 stream. Periodically, fences, buildings, equipment and the pickup are replaced. These are included in the buildings and equipment column. The discounted net benefits curve is shown in Figure 2. ‘(he point where it is equal to zero gives the internal rate of return. For alternative A, the IRR=0.9 percent which is less than the rate from alternative uses of capital. ‘vhis mode] is not a profitable investment for capital after the withdrawal for the owner. The IRR for the other models would also be negative. Comment on a 50-Sow Commercial Operation Based on the study team’s analysis of the §-sow models, the possibility of a 50-sow operation ap- pears marginal. The larger model would require a greater investment per animal in facilities and equipment, more hired labor, and may neces- sitate expenses for boars. ‘he combination of these factors and the high feed costs are the major iupeciments to a successful large scale full-time hog operation. $3,000 $2,.000F $1,000 = ra s = $1,000} a & 5 ¢ —$7,.000- a — $9,000) = $4,000 $5,000 + later! pote of veto =O Li i i i. mT ra i 0 im 2% 3% «4% FY G% Pu Inheneat note Figure 2—Determination of internal rate of return from discounted net benefits, Alternative A, hog enterprise, St. Croix, U.S. Virgin Islands, 1973. Note: the internal rate of return is that interest rate at which the sum of the discounted net bene- fits is equal to zero. Table 11.—Internal rate of return after a charge for owner's labor and management for hog enterprise, St. Croix, Virgin Islands, 1973 Alternative’ Item Se A B C Annual operating income 20 OL nes Market hoe sales 8,376 8.376 6,980 Sow sales 400 400 400 TOTAL 8,776 8.776 7,380 Annual cash operating expenses Vaniable costs 5,924 6,991 6,991 Owner's labor and management 2,153 2,155 2,153 Fixed costs (cash items only) 130 130 130 TOTAL 8,207 9,274 Qe74 Annual cash generated 569 [498° 11,894] * Investment (Year 1) Buildings and equipment 4,125 4,125 4.195 Land 2,000) 2,000 2,000 Livestock 2,667 2,667 2,667 TOTAL 8,792 8,792 H,792 Internal rate of return * 0.9% Negative Negalive (After a charge for owner's labor and management) ‘See footnotes on Table & for feed costs and price assumptions. * Brackets indicate a loss in cash. *See Table 12 for computations. Table 12.—Cash flow projections for internal rate of return, hog enterprise, St. Croix, Virgin Islands, 1973 (Alternative A) Buildings Total Year Land and Livestock Operating cash Operating Net equipment expenses oullay income benefits a a a ar re ae Dollars - Oo I 2,000 4.125 2.667 8,207 16,999 8,776 — 8,223 2 _— — 8,207 8,207 4.776 569 4 _—— — _——— 8,207 4.207 4,776 569 4 soe — 8,207 8,207 O,776 569 5 — 730' _—— 8,207 8.937 R776 —16] 6 —- —_— — 4,207 4,207 8,776 569 7 aa —_— — 8,207 8,207 8,776 69 A |,1257 -__—. §,207 9.332 H77b —556 9 _——— — — 8,207 4.207 6.776 569 10 — $000 * _— §,207 11,207 8,776 —2 431 11 _ — —— 8,207 8,207 4.776 569 12 a — 8,207 8,207 8,776 569 13 —- =——i 8,207 8,207 4.776 369 14 — — —— 8,207 8,207 8776 569 15 — 730° -—— 8,207 8,937 8.776 —161 16 1,125? —— 8,207 9,392 HO776 — 556 7 a = #,207 4,207 8,776 569 18 —- a = 8,207 6,207 8.776 564 19 . —_— £207 8.207 #776 569 20 — 2,000 —563* —? 667 8,207 2.977 8.776 4,799 "Replace fences "Replace buildings, fenees and equipment excluding pickup truck 7 Replace pickup truck ‘Estimated remaining value of pickup 10 APPENDIX Appendix Section 1: Derivation of Gross Income, Total Cost and Returns to Owner’s Labor and Management Equations, Hog Enterprise, St. Croix, Virgin Islands, 1973 DEFINITION OF FACTORS Income Equation G, — Gross income per litter N,= Number of pigs weaned per litter N= Number of sows sold per litter W,= Weight of market pigs in pounds W,= Weight of sows in pounds P_— Price of market pigs per pound P= Price of sows per pound N=Number of pigs weaned per litter G, = Gross income Cost Equations E,, — Total costs per litter V=All variable costs excluding feed and owner's labor per litter F — Fixed costs per litter R,=Number of pounds of baby pig starter con- sumed per pig R,= Number of pounds of hog ration consumed per pig R,=Number of pounds of sow ration consumed per litter R= Number of additional pounds of feed con- sumed by gilts to breeding age P, = Price of baby pig starter per pound P= Price of hog ration per pound P —Price of sow ration per pound E, =Total costs for year INCOME EQUATIONS Income Equations—Per Litter G_=(N,—.25) W,P_+N_WP_—.02 [N,W_P. ] (N,—.25) pigs are sold because + wilts are retained from a yearly total of 16 litters for breeding stock. There- fore N.=.25 or + sows are sold per year, The last term accounts for a 2% death loss after weaning. G, =N,W,P.,—.25W,P_, +N.W,P.—.02N,W,P But N.=.25 and W_=400 G,—N,W,2,,—-25W,2,, + 100P,—.02 N,W,P,, G, =.98N,W,P_,—.25W,P_, + 100P, Income Equation—Per Year G = (2) (8)[.98 N,W,P, —.25W,P_, +100 P|] G, = 15.68 N,W,P_, —4W,P_ + 1600 P. EXPENSE EQUATIONS Expense Equation—Per Litter, 66-Pounds Sale Weight E.=(V+F) +R,P,N,+R,PN, +R P+.25 RP, —.02[R,P.N,] Last term assumes that 2% mortality rate occurs at 25 pounds, But R, =35, R,= 1127, R= 420 and R, = 12 for 66-pound pigs E, —(V+F) +55P,N, + 142 PN, +1127P, + (.25) (1076) P,—2.84 PN, E,=V +F +55 PN, + 139.16 PN, + 1396 P, But P,=1.33 P,. Approximate relationship existed on June 1973 price list of local feed company. E,=V+F + 73.15 PN, + 139.16 P.N, + 1396 P. il Expense Equation—Per Litter, 66-Pounds Sale Weight (continued) E,=V+F+212.31 PN, + 1396P, But from Table 5 V+ p= 2810831 FE, = 108.31 + 212.31 PN, + 1396 P. Expense Equation—Per Year, 66-Pounds Sale Weight E. = (2) (8) (108.3! +212.31 PN, +1396 P.) E, = 1732.96 + 3396.96 PN, + 22336 P, Expense Equation—Per Litter, 132-Pounds Sale Weight E, =(V-+F) +53 P.N,+378 PN, +1127 P+ (.25) (840) P—.03 [236 P.N)] Last term assumes that 3° mortality rate occurs at 66 pounds. E, =(V+F) +55 PN, +370.92 NP, + 1337 P. But P, =1.33 P, (See previous example) Eo =V + F+73.15 PN, +370.92 NP + 1337 P, EB, =V+F+444.07 PN, + 1337 P. E, = 108.31 +444.07 P/N, +1337 P. Expense Equation—Per Year, 132-Pounds Sale Weight E, = (2) (8) (108.31 | 444.07 PN, + 1337 P.) E, = 1732.96 + 7105.12 P/N, +21392 P. Expense Equation Per Litter—220-Pounds Sale Weight E, =(V+F) +55 PN, +798 PN, +1127 P, + (.25) (420) P, —.03 [656 P,N,] Same death loss assumption as 132-pound ex- ample, 12 Expense Equation Per Litter—220 Pounds Sale Weight (continued ) E, = 108.31 + 851.47 P/N, + 1232 P. See previous examples for computation procedure. Expense Equation—Per year, 220-Pounds Sale Weight E, = (2) (8) (108.31 + 851.47 PN, + 1232 P.) E, = 1732.96 + 13623.52 PN, + 19712 P, RETURN TO OWNER’S LABOR AND MANAGEMENT EQUATIONS Sale Weight, 66-Pounds R,,— Return to owner's labor and management R, =15.68 N,W,P,, —4 W,2,, + 1600 P. —[1732.96 + 3396 PN, + 22336 P | R,,, = 15.68 N,W,P_,—4 W,P,, + 1600 P. — 1732.96 — 3396.96 PN, — 22336 P, However P= Pp i Prices are about equal on local teed price costs) R,,,=4W,2,, (3.92 N,— 1) —3396.96 PLN, 22336 P, + 1600 P_ —1732.96 Sale Weight, 132-Pounds RK, =[15.68 NWP —+ WP. + 1600 P| [1732.96 + 7105.12 PN, + 21392 P R,,, —+ W,P_ [3.92 N,—1}-7105.12 P,N, —21392 P, + 1600 P —1732.96 Sale Weight, 220-Pounds R= 115.68 NWP —1 WP} 1600 P| —{1732.96 + 13623 P/N, + 19712 P Rum = + W,P,, [3-92 N, —1]— 13623 P.N, — 19712 P, + 1600 P, — 1732.96 I Appendix Section 2: Breakeven Equations for all costs excluding owner’s Labor and Management for 66-,132- and 220-Pound Sales Weights, St. Croix, Virgin Islands, 1973 BREAKEVEN EQUATIONS * Breakeven Liveweight Price—66-Pound Sale Weight At breakeven point G.=E 15.68 N,W,P_,—4 W,P., + 1600 P. = 1732.96 + 3396.96 PN, + 22336 P. But assume (as in the analysis) P_=.25, N=? and P_—P, (15.68) (7) W,P—4 W,P, +400 = 1732.96 +- (3396.96) (7) P, + 22336 P, 109.76 W,P,, —4 W,P., +400 - 1732.96 + 23778.72 P, + 22336 P, 105.76 W,P_ = 1332.96 +46114.72 P, 1332.96 + 46114.72 Py 105.76 Wy P, is the price per pound of feed. With feed prices expressed in cwt, the equation becomes: ‘Calculated to include all costs except owner's labor and management, as this is assumed to be a part-time enterprise. Breakeven Liveweight Price—66-Pound Sale Weight (continued ) 1332.96 + 461.15 P’, 105.76 W; Pree = P= Breakeven prices for 66-pound hogs Breakeven Liveweight Price—132-Pound Sale Feight By the same procedure as above the 132 pound breakeven equation is: 1332.96 + 711.28 P's 105.76 W; Prat 1g Breakeven Liveweight Price—220 Pound Sale Weight >... 1332.96-+ 1150.77 P*e _ 105.76 W, Appendix Section 3: Explanation of the Internal Rate of Return The internal rate of return, or discounted rate of interest as it is sometimes called, is a means of refining the usual cost and returns analysis by taking into account the income and cost flows over over the life of the project as opposed to an estimate for a point in time under the usual analysis. The internal rate of return is a measure of long term profitability under specified cash How as- sumptions. The concept is particularly useful if year-by-year cost and returns relationships are expected to change over time. For example, major capital costs may be incurred during the first two or three years of a project while the revenues may not reach full development levels until the project is several years underway. Since the internal rate of return is based on discounted cash flows, it is useful in analyzing the above effects even when based upon the same data used in the conventional analysis. In layman's laneuage, the internal rate of return is the highest rate of return on invested cap- ital that an enterprise could afford to pay and cover total costs over the life of the project. If the rate of interest charged by banks is higher than the indicated rate of return on the proposed investment, the project is not considered feasible because anticipated returns are insufficient to 13 14 pay for the cost of the capital. If the internal rate of return is higher than the rate of interest charged by the bank, the project is feasible and will contribute some entrepreneurial income to the owner or owners because the returns on capital are greater than its cost. Technically, the internal rate of return is that rate of interest on invested capital at which the sum of the discounted income flows is equal to the sum of the discounted cost Hows. Alter- natively, it is the rate of interest at which the sum of the differences in the cost and income Hows is cqual to zero,