““The Opportunity is in the VarianceThe Opportunity is in the Variance””
Precision Agriculture: The StrategicFuture of Animal Production
Global ResourcesGlobal Resources,,Changing GovernmentChanging GovernmentPolicy and thePolicy and the Basic BasicConditions Conditions AffectingAffecting
Food ProductionFood Production Costs Costs and Demand for Food and Demand for Food
Cost Megatrend
Are We Running Out ofAre We Running Out ofWorld Resources orWorld Resources or
Can We Solve ProblemsCan We Solve ProblemsThrough Ingenuity andThrough Ingenuity andMarketMarket Mechanisms Mechanisms??
The big question seems to havealready been decided
Population GrowthPopulation GrowthAvailable WaterAvailable WaterAvailable EnergyAvailable EnergyGlobal WarmingGlobal Warming
The Big FOUR
REPOSITIONING THEREPOSITIONING THEMEANING AND IMPACTMEANING AND IMPACTOF U.S. AGRICULTUREOF U.S. AGRICULTURE
Abundance as a negative
Limiting Future Production ThroughLimiting Future Production ThroughCost IncreasesCost Increases
• Taxing Exports (Cap and Trade)• Thwarting Export Growth (MCOOL/Trade Barriers)• Regulating and Taxing Odor, Manure, Dust, Worker
Benefits (National Health Care)• Reducing Antibiotic Use• Policies to Reallocate Feed Grains to Fuel and Raise
the COP for Meat• Limiting Technology and Regulating Animal Care• Policies Raising the Cost of Water Use• Policies Raising the Cost of Energy Use• Policies Restricting Business Arrangements (Packer
Ownership, Contracting)• Policies Easing the Barriers to Citizen Suits (EPA and
Others)• Employee Benefit Mandates/Easing Union Formation
Limiting Future Demand ThroughLimiting Future Demand ThroughCost Increases and DemographicsCost Increases and Demographics
• MCOOL and Other Trade Regulations• Educating Against and Taxing Meat Consumption
(Obesity-National Health Care, Global Warming, Waterand Energy Use, Animal Welfare), Forcing CalorieCounts to Menu Items, Limiting Salt Usage
• Positioning Religious Leaders Against MeatConsumption (HSUS and others)
• Natural Baby Boomer Demographics• Policies Requiring Locally Produced Purchasing for
Government Entities (Food Miles)• Reducing Meat in School Lunch Programs• CAFOs: Positioned as Unfixable by Technology• Goldschmidt Hypothesis: CAFOs Destroy Local Fabric
of Communities• Raising the Cost of Meat Through Supply Reduction
With Challenge ComesWith Challenge ComesOpportunityOpportunity
Achieving SubstantiallyMore with Fewer
Resources:Precision Agriculture
Precision farming or precision agricultureis an agricultural concept relying on theexistence of in-field variability. It requires theuse of new technologies, such as globalpositioning (GPS), sensors, satellites oraerial images, and information managementtools (GIS) to assess and understandvariations. Collected information may beused to more precisely evaluate optimumsowing density, estimate fertilizers and otherinputs needs, and to more accurately predictcrop yields. It seeks to avoid applyinginflexible practices to a crop, regardless oflocal soil/climate conditions, and may help tobetter assess local situations of disease orlodging. Source: Wikipedia
What is Precision Ag?What is Precision Ag?
Which Method is PrecisionWhich Method is PrecisionIrrigation?Irrigation?
Precision AgriculturePrecision AgricultureWhat Was Your Yield/Acre?What Was Your Yield/Acre?An Obsolete QuestionAn Obsolete Question
Understanding Input NeedUnderstanding Input NeedVariations Variations DuringDuring the Production the ProductionProcessProcess
Responding Responding ““on the flyon the fly”” with withPrecision Input ApplicationsPrecision Input Applications
Point
First Step: Coming to See theFirst Step: Coming to See theWorld as Distributions Instead ofWorld as Distributions Instead of
Only AveragesOnly Averages
High Variance Low Variance
Same AverageDifferent Variance!
FUTURE OPPORTUNITY IS INREDUCING VARIANCE
An Illustration Using COPAn Illustration Using COP
Forecasting Hog COP for 2009Forecasting Hog COP for 2009 2005-2008 Corn Price Range:$1.56 - $7.38/bu
Corn Price Range: $5.82 2005-2008 SBM Price Range: $148.70 - $459.50
Meal Price Range: $229.34
Using USDA 2009 Average Price Estimates for Cornand Soybean Meal: $3.55-$4.25/bu and $250-$310/short ton
0
0.005
0.01
0.015
0.02
0.025
0.03
0.035
0.04
0.045
Figure 1. 2009 Forecasted Average Cost of Production for Hogs in the U.S.
!"#$%&%'()*)+,-./%0#1-#22
2009
0
0.005
0.01
0.015
0.02
0.025
0.03
0.035
0.04
0.045
Figure 1. 2009 Forecasted Average Cost of Production for Hogs in the U.S.
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Reducing VarianceOf Expected Cost of ProductionThrough Locking “Margins” RatherThan Only Costs or Prices
The Most Important Metric:The Most Important Metric:ProfitProfit
The Path to Increased Profits For ModernProducers is Through the Variance
The Single Pig CalculationThe Single Pig Calculation
COST/RETURN
Cost of Gain
Slaughter House Pricing
Weight of Pig
Typical Choice for Optimum:As Close to First Discount as Possible
Very Large Discounts fromPigs That areToo Heavy
180 200 220 240 260 280 300 320 340 360
What Happens if YouSet the Group Average At the Single Pig OptimumWeight?
A Very Important Take Home MessageA Very Important Take Home MessageComparing Group Average Weight to theComparing Group Average Weight to theIndividual Pig Optimal WeightIndividual Pig Optimal Weight
180 200 220 240 260 280 300 320 340 360
Optimal Avg Weight for a Distribution Of Pigs Will be LOWER Than For a Single Pig
Value Change is NotSymmetric on EachSide of the Mean as YouLower the Weight of theDistribution
The Distribution Average WeightIs Lowered Until the Gain in NetIncome from Lowering is Maximized
The WIDER the Variance in WeightsThe WIDER the Variance in WeightsThe LOWER will be the Profit OptimalThe LOWER will be the Profit OptimalWeightWeight
Pigs Below Profit Optimal(Lost Opportunity)
Pigs Above Profit Optimal(Lost Opportunity)
Single Pig Profit Optimal Weight
Selling Pigs as a Distribution of Weights
Packer SendsReport of “Discounts for Weight”
Who Sends ReportFor INCREASED Lost OpportunityHere to Offset Against Gains FromReducing Heavy Weight Penalties?Answer: No One!
Producer LowersAverage Weight toAvoid Heavy Weight Discounts
TOO MANY BALLS IN THE AIR toTOO MANY BALLS IN THE AIR toFOCUS ON ONE! (except PROFIT)FOCUS ON ONE! (except PROFIT)
FOCUS FIRST on Profit Maximizing Weight(NOT PACKER DISCOUNTS)
FOCUS SECOND on Reducing Variance inMarket Weights
Profit Optimal Weight Will Increase asVariance is Reduced
Master Slow Changes in Market WeightDirection Following Seasonal Price Patterns(Assuming Feed Cost Constant)
FE and ADG that RESULT at ProfitMaximization are the IDEAL FE and ADG foryour current system
Illustration of Precision AGIllustration of Precision AG
Reducing Variation and Optimizing
Initial Situation
Maintaining Original Weight and Reducing Variation in Sales
Initial Situation
These Distributions HaveThese Distributions HaveDifferent Costs, DifferentDifferent Costs, DifferentRevenue and Very DifferentRevenue and Very DifferentProfitsProfits
Visualizing VariationVisualizing Variation
Measuring and ControllingMeasuring and ControllingVariance is the Key to FutureVariance is the Key to FutureProfitabilityProfitability Disease is the Number One Cause of
Variation During Production Phase Incorrect and Incorrectly Executed SOPs
Increase Variation (How Many Cooks are inthe Kitchen?)
Systems Built 5-20 Years Ago Are OftenStressed with Over Capacity Due toSteadily Increasing Productivity
Market Selection Mechanisms are Crude atBest Yielding High Variance Outcomes