Livestock Research for Rural Development 25 (10) 2013 Guide for preparation of papers LRRD Newsletter

Citation of this paper

Comparative analysis of profitability among feeder-pig, pig-finishing, and farrow-to-finish production systems under the Smallholder Improvement Management System in Ntcheu District of Central Malawi

Marvin Mbaso and Bonet Kamwana*

Export Development Fund, Lilongwe, Malawi
marvinmbaso@rocketmail.com
* Department of Agribusiness Management, Lilongwe University of Agriculture and Natural Resources, Lilongwe, Malawi

Abstract

A study was conducted to compare the profitability of three pig production systems; (1) feeder-pig system, (2) pig-finishing system and (3) farrow-to-finish system. The three systems are practiced under the Smallholder Improvement Management System in Ntcheu District of Central Malawi. Simple random sampling was used to collect data from 90 households. The data was subjected to gross margin analysis, net profit margin analysis, return on investment (ROI) and correlations to determine and compare the profitability among the three systems.

All the three systems registered positive gross margins ranging from K6093 per pig for the pig-finishing system to K20842 per pig for the farrow-to-finish system. A comparison of the gross margins among the three systems showed that there were significant differences at the five percent level. When net profit margins were computed, the results showed that there were no significant variations in the way the farmers controlled overheads. The results also showed that farrow-to-finish system had the highest ROI of about 61 percent. Additionally the results showed that there was a positive correlation between selling slaughtered pigs on both gross margins and ROI. Therefore, farmers who want to go into pig farming are encouraged to adopt any of the three enterprises depending on their capital requirements and risks associated with the enterprise.

Key words: correlation, gross margins, pig production systems, profitability, return on investment


Introduction

Livestock constitutes a developing sub-sector of agriculture with underutilized and underestimated potential to contribute to household and national food security in Malawi. Compared to crop production, livestock constitute a relatively small subsector in Malawi’s agriculture. Due to this, the Malawi National Innovation Coalition recommended the Livestock Platform as one of the four commodity based innovation platforms. The platform is being implemented by the Malawi Research into Use (MRIU) which has put pig farming as one of the priority areas in Malawi’s Agriculture Development Programme.

The emphasis on pig farming has come about because, unlike other livestock, pigs have several advantages. Research has shown that pig production requires a small area and is appropriate in areas where the population density is high (Owen et al 2005). In addition, pigs are also favored because they have a short generation interval and rapid fecundity, 15000 taste buds which allow them to eat anything edible, yields more carcass than cattle, sheep or goats, adapt rapidly to most environmental conditions, and possess large cecum which make their droppings rich in nutrients for crops and recycling into other livestock feed (Visser 2004; Rekwot 2003; Ramsay et al 1994). Studies on pig meat consumption in the developing world have also shown that pig meat consumption is steadily increasing at the expense of beef (Owen et al 2005; FAO 2005; Mtimuni 2001).

Pigs are produced with a wide variety of production systems in Malawi. These systems can be divided into feeder pig production, finishing of feeder pigs (pig finishing), and farrow-to-finish operations. Feeder pig production includes a breeding herd, the farrowing of pigs and marketing of pigs at approximately eight weeks of age and weighing approximately 25kg. Pig finishing production involves purchasing approximately eight week old feeder pigs weighing approximately 25 kg and selling slaughter hogs weighing 60-85 kg. Farrow to finish pig production includes a breeding herd, the farrowing of pigs, feeding pigs to approximately five months of age and slaughter hogs weighing 60-85kg.

The objective of going into any of the three production systems is to produce breeding material or as much meat as efficient as possible (Maree and Casey 1993). One way of determining the potential of these production systems is by means of assessing their profitability. In principle, farmers’ choice to engage in any business venture is predicted on the relative profitability, return on investment, risk of the business and start-up capital requirements (Rogan 2004).

Most research on pigs focuses on piggery business in the context of farrow-to-finish. Consequently, there is limited information on the comparative profitability of the three pig production systems. This calls for a study which focuses on piggery business in the domain of the three systems of feeder pig production, finishing of feeder pigs, and farrow-to-finish operations. This study therefore addresses the outlined deficits by carrying out a comparative profitability analysis among the three systems. The study benefits both smallholder farmers and commercial producers as they will be able to decide venturing into any of the three enterprises based on empirical evidence.


Materials and Methods

The study was conducted at Manjawila in Ntcheu district of Central Malawi between November 2011 and August 2012. The area was chosen because pigs are raised under the improved management system. The Agriculture Research and Development Program (ARDEP) introduced piggery stud breeding project and farmers in the area are organized in groups. In addition, all the three pig production systems are practiced in the area. A representative sample of ninety farmers, thirty farmers from each production system, was drawn using simple random sampling. Both primary and secondary data was collected. Primary data was collected from the farmers and key informants using a questionnaire and checklist respectively where questions to do with sales, production costs and other production issues were answered. Data analysis was done using SPSS 16, Stata 11 and Excel 2010

As a basis of analysis, the cost return structure was computed for each production system. The total investment was computed including the cost of pig housing. Since smallholder farmers were the focus of the study, the analysis of the pig housing was based on pole buildings with concrete floor. The pig housing was depreciated at an annual depreciation rate of 20%. Average returns and costs per production system were calculated to provide a platform for calculating gross margins, net profits, returns on investment (ROI), and breakeven points.

Gross margin

This study used the gross margin (GM) approach to compare profitability among the three systems. Gross margin analysis is the most common method used to determine profitability. Ahmad et al (2005) found that gross margins were a more accurate estimate of profitability. In addition to accuracy, Forestry (2009) noted that farm gross margin provides a simple method for comparing the performance of enterprises that have similar input requirements for capital and labour. Many more other studies both on crops and livestock (Bagamba 1998; Hyuha et al 2011; Kraybill and Kidoido 2009; Malaiyanda et al 2010) also used the gross margin method of determining profitability.

The gross margins were determined by subtracting total variable costs from gross revenues as shown in Equation 1. The gross revenues were calculated as a product of the stated price of the commodity and the quantity of production reported by the respondents. Total variable costs were calculated as the summation of the product of the unit input cost and the quantity of each input used in production.

GM= GI - TVC……………………….Equation 1

Where:

GM= Gross margin (in Malawi Kwacha (K))

GI= Gross income (Quantity *unit price in K)

TVC= Total Variable Costs (K)

Net profit

Net profit is the residual income remaining after all operational expenses, including fixed overheads, have been deducted from total revenues. Net profit shows how good an enterprise is at converting revenue into profits attributable to owners. It is given by:

NP = GM – FOH…………………………..Equation 2

Where:

NP = Net Profit

GM = Gross margin as calculated using Equation 1

FOH = Fixed Overheads

Return on Investment (ROI)

The ROI is a very important ratio in measuring the profitability of operations. It measures the percentage of return on funds invested in the business by its owners. The ratio tells the owner whether or not all the effort put into the business has been worthwhile. If the ROI is less than the rate of return on an alternative, risk-free investment such as a bank savings account, the owner may be wiser to sell the investment, put the money in such a savings instrument, and avoid the daily struggles of small business management. The ROI is calculated as follows:

ROI = Net Profit/Net Worth*100%....................Equation 3

Where:

ROI= Return on Investment

Net Profit = profit calculated using Equation 2

Net Worth = is the amount of funds invested in the business less short-term borrowings

Breakeven analysis

Breakeven analysis identifies the level of operation where the business neither earns a profit nor incurs a loss. It is a useful planning tool because it shows the level of activity required to stay in business. It allows the farmer to know the minimum level of output or output price needed to begin making a profit. This tool determines the total costs an enterprise can expect to incur, separates costs into variable costs and fixed costs and determines the price of the product. Variable costs are those costs that vary with the level of production such as feed cost and cost of purchased piglets. Fixed costs on the other hand are those that do not vary with production examples of which are straight line depreciation and interest. The algebraic approach for calculating the break even volume/revenue is given by Equation 4.

B.E.V = FC/ (P –TVC)…………………Equation 4

Where:

B.E.V = Break Even volume

FC = Total Fixed Costs

P = Price per Unit

TVC=Total Variable Cost per unit


Results and discussion

Cost and return structure of the three pig production systems was done to determine the mean total revenue, total variable costs, gross margins, fixed costs, net profit and capital expenditure (Table 1).

Table 1: Costs and return structure

 

Characteristic

Pig Production System

Farrow-to-Finish

Feeder Pig

Pig Finishing

A.      Number of sows

2.10

2.50

 

B.      Herd size

20.4

24.7

16.2

C.      Number sold live

3.70

 

3.20

D.      Number slaughtered

16.7

 

13.0

E.      Total revenue (K)

807031

348133

629593

F.       Total variable costs (K)

381860

197643

445163

G.      Gross Margin (K) (E-F)

425171

150490

184430

H.      Gross margin per pig (K) (GB)

20842

6093

11385

I.        Fixed costs (K) 

29300

23,636

25641

J.       Depreciation (K)

26671

24411

21437

K.      Net Profit (K) (G-I-J)

369200

102443

137352

L.    Breeding stock (K)

51762

57815

 

M.     Cost of pig housing (K)

133355

129622

107188

N.      Initial Capital Outlay (K)

596277

466531

577992

The revenues for the cost and return structure in Table 1 were based on an average meat price of K550 per kilogram. The average weight (in kilograms) at the point of sell for farrow-to-finish was 73.7, feeder pig was 27.9 and pig finishing was 72.7. The average price of selling live pigs was K35133 for farrow to finish, K14117 for feeder pig system and K34400 for pig finishing.

Gross margin analysis

Gross margin was calculated by subtracting total variable costs from total revenue (Table 1). The positive gross margins suggest that the return on variable costs is higher than the production costs for all three production systems. To determine which pig enterprise production system gave higher returns with respect to variable costs of production, gross margin percentage was calculated (Table 2) The gross margin was divided by the total revenue.

Table 2.  Gross Margins/Sales Ratio

 

Farrow-to-Finish

Feeder Pig

Pig Finishing

Mean

52.6%

29.2%

42.2%

Standard Error

1.59%

0.087%

1.59%

Median

51.8%

28.9%

41.1%

Count

30

30

30

The farrow-to-finish system has the highest gross margin/sales ratio while feeder pig system has the lowest. However these results do not indicate if there are any significant differences in the gross margins amongst the three production systems. Consequently an Analysis of Variance (ANOVA) was done to determine if there were significant variations in the mean gross margins across the three production systems (Table 3).

Table 3. ANOVA table for Gross profit margins

Source of Variation

SS

df

MS

F

P-value

F-critical

Between Groups

0.717

2

0.358

61.4

<0.001

3.101

Within Groups

0.508

87

0.006

     

Total

1.225

89

 

 

 

 

The null hypothesis for testing the gross margins was that there is no significant difference in gross margins among the three enterprises. The results in Table 3  rejects the null hypothesis. It was thus concluded that there were significant differences in gross margins among the three pig production systems. This means that farrow-to-finish has the highest gross margin followed by pig finishing and feeder pig. The lower gross margins in feeder pig system could be explained by relatively higher variable costs and small weights of the live pigs sold. The costs of buying weaners constituted 52% of the total variable costs for the pig-finishing production system.

Further analysis was done to find out if there is any relationship between gross margin and number sows, live pigs sold and carcass sold. It was found that number of sows had a positive impact on gross profit margin for both feeder pig system and farrow-to-finish system (Figure 1). With R 2 = 0.51 (r = 0.714) for farrow-to-finish system and R2=0.58 (r = 0.762) for feeder pig system, there is a reasonably positive association between number of sows sold and gross margin. Thus farmers who want to increase their gross margins should consider selling more sows. Each additional sow sold increases gross margin/sales ratio by 8.76 percent and 6.36% for farrow-to-finish and feeder pig systems respectively (Figure 1).

When the same analysis was done for the pig finishing system, it was observed that selling slaughtered pigs had a positive correlation with gross margin (Figure 2).

However, it was observed that for the pig finishing system, selling live pigs correlated negatively (R2 = 0.47 and r = -0.686) with the gross margin/sales ratio (Figure 3).

These results in Figure 2 and Figure 3 imply that, for farmers who opt for pig finishing system, it is advisable to sell slaughtered pigs (carcasses). If the farmers under this system decide to sell live pigs, the gross margin/sales ratio will drop by 0.61% for each live pig sold.

Net profit margin

Net profit margin is the percentage of income remaining after all the cost of goods sold and other operating expenses have been deducted from total revenue. It was calculated to determine if there were any significant differences in the mean fixed overheads incurred by farmers under the three production systems. The expenses which were used to calculate the net profit included: maintenance costs and other overheads such as brooms, working suits, gloves, hoes, disinfectants and depreciation. The annual depreciation rate of the pig housing was pegged at 20% straight line. The results of net profits (Table 1) follow the same pattern as those of gross margins. Farrow-to-finish had the highest net profit. The mean fixed costs for farrow to finish were K55971, feeder pig system was K48047 and pig finishing was K47078. It can thus be deduced that the fixed overheads incurred under each of the systems were almost equal and are not relevant to decision making when it comes to what production system a farmer should adopt.

Return on Investment (ROI)

The ROI was calculated as a percentage of net income to total capital outlay. With this it was possible to estimate net earnings per K100 invested in the business. The initial capital outlay was calculated by adding together initial total variable costs, fixed costs, cost of buying breeding stock and cost of pig housing. The results of the ROI are presented in Table 4. The ROI for farrow-to-finish was the highest (61.9%), while those for feeder pig system and pig finishing system were lower at 25.1% and 23.8% respectively.

Table 4: Return on investment

 

Farrow-to-Finish

Feeder Pig

Pig Finishing

Mean

61.9%

25.1%

23.8%

Standard Error

4.11%

2.34%

1.57%

Median

60.7%

24.5%

23.0%

Count

30

30

30

Because of the observable slight difference in ROI between pig finishing and feeder pig systems, the t-test for paired sample was used instead of ANOVA (Table 5).

Table 5. T test for paired samples

   

Pair of comparison

ROI  means

P(T<=t) two-tail

Pig finishing  vs. Feeder

0.235 vs.  0.248

0.697

Pig Finishing  vs. Farrow-to-finish

0.238 vs. 0.612

<0.001

Feeder vs. Farrow-to-finish

0.248 vs. 0.612

<0.001

The first hypothesis was that there is no significant difference in ROI between pig finishing and feeder pig systems. The results from t-test for paired sample failed to reject the null hypothesis (Table 5). It was therefore concluded that there is no significant difference in ROI between pig finishing system and feeder pig system. The second null hypothesis was that there is no significant difference in ROI between pig finishing and farrow-to-finish systems. The results from t test rejected the null hypothesis (Table 5) and it was concluded that there is a significant difference in ROI between pig finishing and farrow-to-finish. The last null hypothesis was that there is no significant difference between feeder pig and farrow-to-finish enterprises. The results from t test rejected the null hypothesis (Table 5) and it was thus concluded that there is a significant difference in returns between farrow-to-finish and feeder pig production systems.

From the ROI analysis it can, therefore, be concluded that farrow-to-finish pig production system gives more earnings per capital employed than the other two systems. The probable reason there was no significant difference in ROI between feeder pig and pig finishing systems could be due to the absence of cost of breeding stock in pig finishing enterprise and the inclusion of cost of breeding stock and relatively higher cost of pig housing under the feeder pig system.

Break even analysis

Break even analysis was done to determine number of sows, weaners and porkers required to recover total fixed costs (Table 6). It also measured the amount of revenue that must be achieved to recover total fixed costs. The first step was to determine break even revenue which was calculated by dividing total fixed costs by overall contribution/sales ratio. The second step was determination of number of sows and weaners required to produce products in order to break even. Farrow-to-finish system had the lowest break even revenue and the required sellable units to break even (Table 6). This is so because farrow-to-finish has the highest overall contribution margin. Farmers adopting the farrow-to-finish system can break even with one sow and be able to make profits because one sow on average can farrow up to 11 piglets. Feeder pig production can also break even with one sow but with a relatively higher number of required sellable units. Pig finishing production system requires four porkers to break even and has the highest breakeven revenue because it has the lowest overall contribution margin.

 Table 6.  Break even analysis

Break even

Farrow-to-Finish

Feeder Pig

Pig Finishing

Break even revenue (K)

106368

113855

160950

Number of sows

1

1

 

Required sellable units

3

8

4


Conclusion


References

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Received 24 July 2013; Accepted 22 September 2013; Published 1 October 2013

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