Abstract

While current economic conditions do not necessarily support investment in production facilities, at some point widespread investment will occur. Each pork producer will face decisions at the farm level about which product channels they will supply based on the costs and incentives to produce. Some producers will be legally required by state laws to abandon the use of certain production practices and the facilities that support this production which will inflict significant costs and inefficiencies on producers and the entire pork value chain. Other producers will be reluctant to make costly investments to target specific markets, unless compensated with guaranteed long-term premiums. The overriding objective of this study was to conduct an economic analysis of investing in new gestation housing facilities for a farrow to wean operation. Several approaches were used to accomplish this objective. Existing literature and public information were collected, reviewed, and summarized to establish baseline values on gestation facility types and housing practices, production performance differences, and cost estimates. Economic models were then developed to estimate the net present value (NPV) to a producer from investing in new gestation stall housing versus conventional group housing versus group housing with increased square feet per sow systems. The latter case would be consistent with recent laws requiring farmers to provide a minimum amount of square feet to breeding pigs in gestation. A sensitivity analysis was then conducted to understand how NPV estimates are impacted by feed and non-feed operating costs, interest rates, sow productivity, and up-front building costs. The NPV analysis found gestation stall housing to have a positive NPV of $7.81 million for a 6,400 sow unit. This suggests that a producer will make a larger return on the gestation stall housing facility investment than the discount rate used for the analysis. Therefore, from an economic standpoint, this investment should be made. A 6,400 sow conventional group housing facility has an estimated negative NPV of $1.52 million. The conventional group housing system NPV had the same base revenue economic assumptions as stall housing, however differences occurred with sow productivity and input costs. So, without a price premium for conventional group housing, the investment shouldn’t be made. When we apply the conventional group housing sow productivity and operating expense parameters to the group housing with increased square feet per sow facilities, of 4,800 and 6,400 sows, with their associated investment levels, we observe large negative NPVs. The revenues generated over the asset’s useful life do not cover the operating and fixed expenses of the system. Due to the negative NPV, the investment should not be made. Large price premiums for group housing with increased square feet per sow would be needed to make it an economically viable investment. The negative NPVs continued to worsen2 as sensitivity analyses were conducted by increasing selected costs as well as adjusting productivity parameters based on information collected from multiple sources.