Dr. Dennis DiPietre - Precision Agriculture: The Strategic Future of Animal Production

““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.

!"#$%&%'()*)+,-./%0#1-#22

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