Understanding Grow-Finish Barn Break Evens
More used grow-finish facilities have been hitting the market in recent years compared to the previous years. This is the case for several reasons:
- The cost to build a new facility has increased drastically.
- There have been producers retiring or leaving the profession.
- The average age of active pork producers is on the rise.
The industry saw a large number of grow-finish barns built in the mid 90’s to the mid 2000’s and today those producers are looking to market those facilities. This creates an opportunity for new growers looking to enter the pork industry or current growers expanding their operations. Regardless of the situation, I recommend producers consider the following four factors when evaluating the cash flow of a grow-finish facility.
The numbers and averages used below are general figures or are derived from FINBIN data, which is published annually by the University of Minnesota. To get the most accurate assessment for your specific situation, use data from your local area or use actual values from your operation.
- Operating costs: These costs would include but are not limited to LP, electricity, supplies, repairs, taxes and insurance. FINBIN data shows that wean-to-finish operating costs have risen by 24.5% over the past 5 years. The largest increases come from insurance premiums, repair costs and utility costs. A historical “rule of thumb” has been $10-$11 per pig space. However, according to FINBIN data, this figure is closer to $13-$14 per pig space today.
- Labor costs: It comes as no surprise that wages and overall compensation costs have increased in recent years. On average, for barn owners who provide most of the labor, hired labor costs amount to around $2 per pig space. For barn owners who hire most of their labor or a pig owner who provide labor in custom barns, costs are typically in the range of $8-$10 per pig space.
- Manure value: How you use the manure from your barn can significantly impact the cash flow potential of your investment. Despite the recent decline in commercial N, P and K prices, they have remained consistently high for the past several years. Savings from commercial fertilizer per pig space used to be $4-$6, but now they have risen to $8-$12. This provides a significant advantage to growers with a cropping enterprise that can fully utilize the manure produced from their swine facility. In most cases, a grower may not draw from their barn’s cash flow, so the manure value often serves as the owner’s “return to labor.”
- Debt service: It is important for your barn investment to have a manageable amount of debt that allows for monthly cash flow. This figure depends on the size, term and interest rate of the loan associated with the barn. In my opinion, the best way to determine a sustainable debt service for a barn is to subtract your operating and labor costs from your revenue per space. The remaining amount represents the maximum debt that the barn can cash flow. The end goal is to have a positive margin to help manage any unforeseen or rising costs over time. Note that this does not include manure value, as it can vary year to year. Manure has various sale agreements and can be considered the owner’s “return to labor” depending on the specific situation.
By assessing the break-even point of operating a grow-finish facility, current owners gain a better understanding of how to sustain profitability for years to come. Prospective buyers can also make more informed decisions for their overall business.
Dusty Compart is a Swine Lending Specialist with Compeer Financial. For more insights from Dusty and the Compeer Swine Team, visit Compeer.com