By Rick Kleyn, SPESFEED (Pty) Ltd
The recent increase in poultry feed prices has come about because of two main factors. Firstly, last years maize crop was perhaps smaller than anticipated and secondly our currency has fallen dramatically over those of our major trading partners. This has meant that the cost of our maize has largely been determined by the import parity, while our major protein sources have been purchased in very expensive US $. The net effect of this is that our feed prices have increased by between 45 and 65% during the last 12 months. On the other hand, the net realisation for broilers price has increased by only 14.9% during the same period. (Coetzee, 2002), while the egg price has increased no more than 5% over the past 5 years (Deiner, 2002).
The maize, or more importantly the feed price ratio, which refers to the kilograms of feed that can be bought with the proceeds of the sale 1 kg of product (meat or eggs) has decreased dramatically. This is of grave concern, as this ratio broadly indicates the potential for operational profitability in the poultry industry.
The purpose of this paper is to examine firstly how the feed price ratio will impact on the correct strategies which the poultry producers should follow so as to minimise the impact of a poor feed price ratios. For the sake of brevity, broiler production will be used as a model, but the same factors will be equally relevant to egg producers. Secondly, this paper will deal with two strategies that could be applied by each and every broiler producer so as to improve on profitability.
Margin vs. Profit
The principle objective of any animal production enterprise is to make a profit. Having said this it is essential that we have a very clear idea of what constitutes a profit and how this should be measured.
Many producers measure the technical efficiency of their operations, be it via average hen housed production, PEF’s, feed conversion ratios or any other of a number of different measures. Emerson (2000) makes the point that prior to 1995, at which time industry wide cost data became available through the implementation of the Agristats service, US broiler integrators also measured performance characteristics. After 1995, they moved to cost driven analysis of results. This in itself has shortcomings and he correctly points out that in the future all producers will have to measure performance in terms of returns (profit) rather than in terms of performance or costs.
In order to measure profitability, we need to evaluate our performance in terms of basic production economic principals. As previously mentioned, the measurement of costs alone has some shortcomings. A more correct way of measuring profit would be to measure margin. A margin is normally described as a “a margin over feed costs” or more broadly as “margin over total variable costs”. This is illustrated in Figure 1.
From the figure it can be seen that there are two ways in which to increase margin. Firstly, income needs to be increased, either through achieving higher levels of production or through selling your product for a higher cost. Alternatively, you would need to reduce your input costs but with feed prices increasing the way that they have this is unlikely. It is also apparent that if the margin over variable costs is high, it is possible to deviate significantly from normal levels and still not fall into what we would deem to be a negative margin.
Margin certainly gives an indication of profitability, but without including all costs, true returns can not be calculated. In Figure 2, a fixed cost component has been added. From this it is clear that the area in which a business is profitable is far smaller and thus more sensitive to any changes in input costs or returns. It is essential that in the calculation of a fixed cost for an operation, all costs and not just those associated with the poultry site are considered. For example administrative overheads should be allocated to each house or flock correctly.
Figure 2. A representation of profit
It is easy to appreciate from this diagram that should your variable costs increase dramatically, the fixed costs become relatively less important.
An aspect of measuring profitability that is often forgotten is that of time. We borrow capital on the basis of time (interest per annum) and pay tax on the same basis, so it stands to reason that we need measure our profit per unit time as well. It is well and good to keep a flock of broilers or laying hens for an extended cycle length as your return per bird will in all likelihood increase. However, it needs to be borne in mind that you may well be loosing the opportunity of replacing this flock with a younger, more efficient one. The impact that time has on a broiler operation can clearly be seen from Table 1.
Table 1: The effect of length of growout period and down time on the number of broiler cycles per year
Note that you will gain 1.5 crops per year by slaughtering at 38 days of age with a 7 day cleanout period as opposed to slaughtering at 42 days with a 14 day cleanout. This is a little unrealistic as in practical terms one should work in weeks. All the same, a 38 day cycle length with an 11 day cleanout would lead to an extra crop per year.
Time also has an effect on the biological efficiency of the bird, be it a layer or a broiler. As broilers age so they get larger and their nutrient requirement for maintenance increases. Thus a smaller proportion of their nutrient intake is used for growth than would be the case in a younger bird (Figure 3). It is easy to see the same effect in laying hens, which as they age lay fewer eggs and consume more feed.
The Value of Outputs
The only way to ensure that the value of your outputs remains the same or improves is to improve your technical efficiency or to increase the value of your saleable product. The following comment was made about the table grape market at the International Farm Management Association conference held in Durban in 1999. “If you don’t make it to the supermarket shelves then you are in the wholesale war zone, and it is blood that flows in this arena and not grape juice”. Exactly the same could be said of the poultry industry. In essence good marketing is the cornerstone of good returns. It is true that the value of your output could be increased by further processing or even by selling your product as fast food.
From what has been discussed thus far it is clear that our objective in broiler production is to measure profit per production unit (in this case per square meter of house space) per unit time. It is proposed that the measure be defined as Unit Profitability or UP. UP can be described by a simple equation:
UP = ((Income from birds m )-(All Costs m ))/Cycle length
The application of UP can be as far-reaching or as simplistic as the user wishes. For example, it is possible to use the income from the sale of live birds at the farm gate as an input. Alternatively, and more correctly, it would be possible to realise the net realisation of the birds sold to the supermarket, which would take the cost and value added of any processing into consideration.
Some case studies
In order to demonstrate just how important it is to make the correct decisions regarding any changes to the broiler bio-economic model (i.e. changes to either the cost structure, the level of technical efficiency or time) a number of exercises were carried out. The first example examines the effect of a decrease in the feed ratio. It is based on the results of an experiment that we carried out at the Ross research farm at the end of 1999.
In this trial, three different dietary regimes were used, high-energy diets, medium energy diets and low energy diets as are shown in table 3. The results that were achieved are shown in Table 3.
Table 2: Energy level and cost of diets
From table 4 it can be seen there was a 4.2% difference in body weight between the HE and LE energy fed birds. It can also be seen that the HE diet utperformed the LE diets by about 16% in terms of PEF. When looking at costs a different picture emerges with the HE diet being only 2.1% cheaper than the LE diet. Interestingly the LE diet was a cheaper way of producing broiler meat than the ME
diet. If one looks at the return per m2 of chicken house it can be seen that the difference in return between the HE and LE diets is in the order of 8%.
Table 4: Financial return (Rand) for diets containing three energy levels at 42 days of age (2000 prices)
As the cycle length was identical for all treatments, there is little or no effective difference achieved through the introduction of the time factor.
The impact of an increase in feed cost: The results in Table 4 were calculated using the feed costs of the time and a selling price of chicken of R 7.00 per kg. What then is the impact of the current feed price (assuming that chicken is sold for R 9.00/kg)?
Table 5: Financial return (Rand) for diets containing three energy levels at 42 days of age (2002 prices)
UP is a more important tool in the measurement of broiler profitability when the feed price ratio is low. PEF and the feed cost/kg of chicken are inadequate.
In a second exercise an attempt has been made to show the effect of a change in technical efficiency will have on profitability. Using data published by North and Bell (1990) it is possible to see what the effect of increasing the stocking density has on broiler performance. Using the price shown in Table 2, it has therefore been possible to calculate what effect these differences would have on profitability.
Table 6: The effect on changing stocking density on profitability of a broiler operation
These data illustrate a number of important points. Firstly, if the feed price ratio drops the only way to remain profitable is to improve technical efficiency, be it by reducing stocking density or improving management in some other way. When the feed price ratio improves, the decision as to what is the correct strategy changes. If one were to look at the PEF for guidance, or even the profit per bird, we would be inclined to use a lower stocking density. However, if we were to use UP, it is clear that the higher stocking density would result in almost twice the return.
In the last exercise, the impact of keeping birds longer (so that they can be sold at a heavier weight) was examined. Using the Cobb Breed standard (1998) for as hatched birds, the same feed prices and an assumed stocking density of 20 birds per m2, the same calculations were carried out as above.
Table 7: The effect of extending the grow-out time on broiler profitability
The above table shows that the return per bird increases dramatically as the body weight of the birds’ increases. However, if we use UP as our measure it is easy to see that this increase is not nearly as dramatic. Indeed, if the mortality were to increase to 5.5% and the achievable body weight were to drop to only 2.1 kg at 44 days, then the UP barely reaches the R 3.00 level.
Examples two and three clearly illustrate the shortcoming of using a farm gate price for broilers in calculations of this nature. It is well known that larger broilers not only have a greater proportion of breast meat, but will also have an increased dressing percentage. If our objective were to sell broiler meat, it would be well to look at these two aspects as well. The other aspect that needs to be born in mind is that as the stocking density increases in a broiler house, the number of carcasses downgraded as a result of scratching and bruising increases dramatically as a result of which the sales value of the product will decline.
The probability that a producer will be able to have a major impact on fixed costs is small. On the contrary, with rising interest rates they may well increase. Although it may be possible to reduce your variable costs by buying chicks from another supplier or by buying a cheaper range of feed, options are limited when it comes to reducing variable costs. In addition to which, saving costs can and often does lead to a drop in technical efficiency. From the examples shown above, it is clear that the only real option that the producer has improve profits is to improve technical efficiency. It is also clear that the feed price ratio decreases, so technical efficiency becomes even more important.
There are numerous ways of improving technical efficiency. These often include more attention to detail in terms of basic management such as house cleanout, effective vaccination, improved chick quality and litter management. They would also include capital items such as nipple drinkers rather than bell drinkers and pan feeders rather than tubes or chain feeders. From a nutritional perspective, it is clear that high-density (more expensive) diets tend towards higher profitability on farm. These diets may not always lead to the lowest costs per kg of chicken produced.
There is a simple strategy that all farmers could follow and that is to correctly apply phase feeding. Figure 4 illustrates how as birds grow so their energy requirement increases relative to their protein (lysine in this case) requirement. Feeding different diets leads to over or underfeeding of these two critical and expensive components of the diet. This will not only have an impact on performance but also on the cost of feeding.
Emmert & Warren (2000) have been able, using all three of the aspects of amino acid nutrition mentioned above, to illustrate this very clearly. These workers compared the NRC (1984) recommendation to three diets formulated to meet the requirements on a weekly. The specifications used in theses diets are summarised in Table 8 and the results in Table 9.
Table 8: Summary of specification of diets used in experiment
Table 9: Results of Experiment (0 to 21 days)
As can be seen phase feeding had an impact on not only FCR (which was not significant), but also on Lysine utilisation. Although not shown, any reduction in Lysine usage would ultimately lead to a reduction in cost. Further experiments conducted on birds of different ages showed significantly improved performance in addition to improved amino acid utilisation.
likelihood that FCR will improve and practical experience has shown us that body weights generally improve when more phases are fed.
Table 10: The effect of phase feeding on both cost and nutrient allocation in broilers
These data illustrate how both the variable costs and the technical efficiency of a flock of broilers can be improved by simply managing a more effective phase feeding system.
Control of feed intake in broilers is now very common. The main advantages are better control of growth and enhanced feed efficiency (due to the minimising of feed wastage and more efficient, compensatory growth). If the control is properly implemented liveability and leg health will also be improved. Manipulation of the hours of daylight is one way of controlling feed intake, and although this can have some problems, it is probably one of the simplest methods. However, when the broiler house is equipped correctly, direct feed intake control is possible, and has the advantage of allowing greater accuracy and predictability. The feed distribution system should be capable of allowing all the birds equal access to feed. Both feeding space and distribution times are critical (Ross 2002). Leeson (2000) suggested an alternative method, and that is to simply feed the birds a mash diet from day 7 to about day 14 of the production cycle. The benefits of controlling growth can bee seen from figure 4.
Hubbard Farms (1998) ran two experiments to find out whether light and feed restriction can improve mortalities and feed efficiency without reducing body weights below an economical tolerable level.
The layout of the experiments was as follows:
Light Trials: Broilers were reared under different light regimes. The control was a 23-hr light and 1 hr darkness cycle.
Feed Restriction Trials: Feed was restricted from days 8 – 21 and 8 – 15 by 20 % and 15 % respectively. A full fed control group was used.
Table 11: Constant Light vs. Restricted Light
LR birds are lighter, but FCR and mortality are better than in the constant light program birds.
FR birds were lighter but there was a significant drop in mortality and an improvement in FCR. The female birds did not show the same drop in mortality, but FCR was significantly improved.
From the results it is clear that by limiting the feed intake early in the growth cycle one can improve the liveability and feed efficiency of your broilers. A period of slower initial growth followed by compensatory growth is always associated with improved feed efficiency, because less feed is directed towards maintenance. The mortalities, caused mostly by heart failure, are reduced by the restriction growth at an early age, enabling the organs to develop better.
An economic evaluation of the figures given shown in Table 11 is shown in Table 12, using the same feed prices as used in the previous exercises.
Table13: An economic evaluation of the effect of light restriction
It is of interest to note that the increase in profitability as measured by the UP was in the order of 30% for a low feed price ratio and only 7% in the case of the high price ratio.
This article has not set out to give any hard and fast rules for maximising profit in the broiler industry. It’s purpose has been purely to illustrate what effect changes in both the broilers on farm performance and the feed price ratio would have on the strategy that producers should follow in order to continue to make a profit.
There are some general comments that can be made
- It is essential that profitability be measured correctly, and it is proposed that the UP system is the best way of doing this. The PEF system gives little or no guidance in terms of profitability.
- When the feed price increases relative to the product price (the feed price ratio drops), fixed costs become less important. and improving technical efficiency becomes all-important.
- It is important that we consider the whole poultry production process and not just the on farm performance and farm gate prices.
- Improving technical efficiency becomes all-important, whether by generally improving management or by taking drastic steps such as a reduction in stocking density.
- By applying relatively simple techniques such as the implementation of the correct phase feeding system or by restricting growth after 7 days of age, significant improvement in UP can be achieved.It is hoped that this article has shown just how important it is that each and every producer does his or her “sums” correctly, and that these sums are the correct ones, i.e. a calculation of UP. In other words, always measure the return per unit of floor space per unit time.