ECONOMIC RESERVES OF HUNGARIAN SHEEP BREEDING

Nábrádi, András Kukovics, Sándor
Jávor, András Research Institute for
Faculty of Agricultural Sciences Animal Breeding and Nutrition
Debrecen University of Agricultural Sciences Herceghalom, Hungary
Debrecen, Hungary

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ABSTRACT

Hungarian sheep production has regressed significantly due to loss of income. This is best reflected in the decreasing flock, but a similar trend is realized in breakdown of the instrument park, and the quality stagnation. The latter would balance or moderate the effects of production level decrease.
Income affecting (costs, yield, and price) and determining factors are analyzed to determine reserves of Hungarian sheep flocks and to improve competitiveness.
Components and effects of materials (feeds, animal health) replacement, ram use, energy, assurance, depreciation, general organization, service, maintenance, wage and its tax among costs are analyzed. The most favourable opportunity is for decreasing the specific salary (specific salary per ewe) due to organizational reserves, but it is thought that this benefit can not be gained in the long run because of the inflation and the expected salary-level increase.

The yield, quality, production aim, adjustment to the market (in time and space) and the price from income elements are analyzed. The adjustment to the market and the marketing at ideal body weight mean reserves of 40-40 percent, respectively, with the knowledge of seasonal price fluctuation. Today the quality determines the income up to only 20-30 percent of that. The production aim - either the prolificacy or milking - means 100 percent reserve in increasing the income.

In the analyses of complex affecting factors the scale of the plant, the breed, the human as a production factor, skill and ownership are considered. These factors listed constitute to reserves of increasing income and profitability.
Reserves inherent in the amount and structure of subsidy are also analyzed. The increase of the present subsidy level up to that of the European Union would be suitable to develop the justified production level back through improving the industry profitability.

It is pointed out that only dynamic changes could drive the industry to successful appearance on the EU market independently of our membership.

Not the cost saving, but the increase of yield and the more flexible adjustment to the market results in the increasing of competitiveness. While the level of costs is the same in Hungary as in the EU, however although there are structural differences due to national features, there is a significant lag behind in our country in association with yields, marketing activity, quality and the timing of sale must be improved.
Such a subsidy level could participate as a significant reserve that would provide a balanced atmosphere in competition.

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INTRODUCTION

The phrase "economic reserves" is an ever more frequently used expression among those dealing with production and its analysis. The negative signs characterizing the Hungarian sheep production for years (decreased stock numbers, low reproduction rate and sold progeny, decreased milk production, etc.) prove that quantitative and qualitative improvement of the industry is vital. With regards to development a dual objective must be met, viz. to increase income with a more rationalized resource utilization. This study tries to stock and analyse, in general terms, those alternatives that are referred to as economic reserves. We assume that income directly affects the will of production, and affects the development of an industry or an activity as a primary motive. Relying on this assumption we have examined the factors determining the level of income.
Income, in general, means the difference of value of production and costs of production¹. We can increase income by reducing production costs or by increasing production value (revenues). Categorical differentiation of this kind of the two factors is in many cases irrational, since income can be increased even in the case of increasing production costs if the rate of cost growth is smaller than the rate of growth of production value. Let us begin with the costs of production by examining the most influential factors and analysing the predictable changes of the future.

The Economic Reserves of Costs of Production

Costs of production can be calculated by multiplying the quantity of used resources by the unit cost of the resources. In our analysis we analyse costs by category, treating and examining the inputs and the future changes of unit costs of inputs together.

Cost of Materials

In general the most significant cost in animal husbandry is the cost of materials (Table 1). It is understandable, since it contains the cost of forages, supplements, premixes, medicines, etc., the sum of which can, depending on the type of the industry, be 50-90 percent of the total production cost. Since this is the largest among the cost categories by far, this is where sensible resource utilization is most needed. Even a few percentage points decrease in costs of materials can result in larger savings than the total amount of depreciation or even transportation costs.

Feed Costs

Unfortunately there is no real chance to reduce feed costs, the most significant proportion of material costs, since feed prices rise with inflation on the one hand, while on the other the present state of feeding practices is the very factor limiting the level of production today. There is little room for differentiation between purchased and produced feeding stuff with regard to predictable cost increases, although it is likely that costs of purchased feeding stuffs will increase more significantly.

Sanitary Materials Used for Individual Identification

An increase in costs of sanitary materials can be predicted with great probability. It is likely that more effective medicines are to be introduced in veterinary practice, but at the same time their prices are likely to increase faster than inflation. The only way of decreasing veterinary costs is to improve environmental and feeding practices that at the same time can result in higher inputs in the mentioned areas, which eventually leads to higher costs. Due to increased prices of tags the costs of identification will rise for sure.

Energy costs

If we can utilize further economies in energy utilization, only a minimal increase is to be predicted in energy costs.

Breeding stock value differentials

The costs of insemination and ram keeping can significantly increase with the increase in breeding and monetary value of male animals. This, in part, can be overcome by an increase in artificial insemination that, besides its drawbacks, can significantly reduce losses due to bad quality rams.
Keeping costs of young ewes for replacing producing ewes will predictably increase, as well as increasing losses due to shoddies.
To counterbalance this the period of productivity can be increased; and here, even though the average stock is old, we still have some room for improvement.

Other material costs will, presumably, increase with inflation.

Personal costs

A great deal of attention must be paid to wages and contributions. In the Hungarian sheep industry the efficiency of the work force is very low (Jávor et al, 1997). On the one hand, stock concentration is very low - around 100 ewes per worker - while on the other hand the number of ewes per worker cannot be increased (150 animals), due to organizational, technological and security factors. While there is a large space for improving technology, its investment costs are very high. Parallel to this, it is likely that the rise in wages will overtake that of the even presently rather high inflation, so the two tendencies (the relative decrease in wage costs due to increased stocks and the increase in wages), even in the best case, can balance each other. A significant part of wage costs is the social security cost. This could be reduced, thus improving the income position of the industry. At the same time, according to the present social security policy, there is a little chance for this to happen.

Depreciation of special (long term investments) assets

The fact that present assets are rather old (as in subjective as real values) calls for reconstruction and investments. Due to this depreciation and repair costs will increase with the extension of assets. With stocks concentration their relative values can decrease but their total value is likely to be larger.

Prorated costs and services

The only way to decrease the relative amount of machinery services is by increasing stock concentration, that in this case again can lead to decreased relative costs. Unfortunately the increasing costs of these services counters this possibility. As a result even this can be summoned as a real resource.

Other costs

The increase of other cost is also likely, since these are also parts of services that get ever more expensive:
· Leasing prices to rise faster than inflation with regards both buildings and pastures.
· With increased animal values the costs of insurance will also rise, since its calculation is based on animal values. (Instead of insurance, a self-maintained contingency fund would function similarly.)
· Loan costs and costs of capital investment are likely to decrease, since lower inflation can mean lower interest rates.

Concluding the above, and taking into account recent years' cost levels, it can be seen that in general the Hungarian producers have no resources with regards to costs reduction. It is possible that individual producers can operate at lower cost levels due to special circumstances, but they can be referred to as exceptions.

Economic reserves and value of production

In the case of examining the value of production we consider two factors: yields and selling prices, since basically the product of these two factors determines the value of production. (VOP = Yield x Price). We try to predict in percentages the effect of factors determining value of production by analysing their simultaneous changes (Table 2).

Yields and its resources

We have already mentioned that the low level of yields hinders profitable operation, since with regards to milk production 5-600 percent (while in offspring the rate is 50-100 percent) is our lag behind countries with developed sheep breeding practices where the level of costs is lower with respect to certain factors; i.e. feeding costs, relative wages, low depreciation (Kukovics et al., 1997).
Naturally this possible increase in yields would significantly increase the costs, so it is necessary to find the optimal level of input utilization.

Possibilities of increasing selling price

Choosing the right selling time, and tuning the production to market tendencies have a reserve of about 40 percent, taking into account of course that we basically sell on a single market that results in a rather defenseless situation. For more on this aspect please refer to the data of Table 3. According to these data much higher reproduction rate (lambs/ewe) is necessary to get the economic balance than present level.
A similar scope of resource lies in the optimization of balancing products sold. Here, again, one has to bear in mind that it is the market that dictates the structure of sold products.

Table 1. Cost of one ewe

Table 2. Reserves in increasing revenues

Table 3. The Price of the Lamb at the Italian Market and the Margin

of the Reproduction Rate, (1997)

(Resource: Jávor et al, 1997/a)

With regard to milk production, our greatest reserve lies in quality aspects that determine processability, type and quality of the final product. It is estimated to be a reserve of 40 percent in Hungarian sheep production.
The resale sector can accept a price differential of 10-15 percent in veal and live sheep. Without marketing and market expansion there is no chance to utilize the reserves in processing, since we can only gain worse prices at our present markets with primary processing, viz. culling. Tendencies around the world are different though. In other species, but in part with lamb as well, there is a tendency towards satisfying the needs of smaller households with packed, semi-processed and kitchen ready products that can earn extra profits.
With regards to increasing revenues and incomes, increasing stock concentration means only a temporary reserve. Today products offered in a larger bulk quantity can be sold at a plus 10 percent price margin -if the quality is satisfactory - due to differences in quarantine, transport and transactional costs.

Factors increasing value of production independent of yields and prices

Besides all this, human knowledge as a factor of production means a reserve. A more thorough knowledge of the market means safer decisions; the learning and acceptance of new knowledge means higher production standards and better quality that are means of increasing productivity and can result either in cost reduction or increased yields and revenues. Of course this latter one can not be measured directly with price and yield indicators, but its importance cannot be neglected.
Subsidies are also factors increasing the value of production, independent of achievable yields and prices. Raising subsidies up to the EU standards can be an effective means of increasing value of production and revenues in the future. There are two important aspects of subsidies: firstly, the present state of the Hungarian economy cannot afford a subsidy level similar to that of the EU. The second is related to stock numbers. After joining the EU, subsidies could be applied for only according to the present quantity of stocks. As a result the agricultural administration should take, before joining, the steps necessary to facilitate a significant increase in stock numbers.

CONCLUSIONS

As a conclusion we can say that in the sheep industry chances of revenue increase and at the same time reserves of the industry lie at the side of value of production. Rising costs can be expected with almost every kind of cost; only a few areas could have been mentioned where costs, with a more rational production, can be reduced. At the same time it is true that the most significant return on extra costs can be expected in material costs- primarily feed costs. It is clear that among the reserves the increase of stock number is the most evident. Advantages that can be achieved by stock increase (relatively smaller fixed costs like depreciation, or a certain proportion of overheads, etc.) are marginal compared to reserves lying in possibilities of increasing revenues and value of production. With regard to yields and selling prices, a reserve of about 10-600 percent could be realized compared to the present situation. Chances of subsidies further increase the achievable results on the income side. At the same time we would like to point out that for a more efficient utilization of resources to be available after the unification, a significant increase in present number of stocks is necessary before joining.

REFERENCES

Kukovics S. - Jávor A. - Molnár Gy. - Ábrahám M. & Molnár A. 1997. [The Development of Quality in Sheep Breeding], In: "Agro 21" Broshures Future view of the Agriculture, 1997,17. sz Budapest,(Edited by: László Csete)
Jávor A. - Molnár Gy. - Békési Gy. - Nábrádi A. & Molnár M. 1997. A juhászat és a jövedelem [Sheep Breeding and the Profit in Hungarian], In: Magyar Juhászat [Hungarian Sheep Breeding], Budapest, 1997/5: 2-5.
Jávor A.-Békési Gy.-Kukovics S. Molnár Gy.-Nábrádi A.-Molnár M. 1997/a. A juhászat kereskedelme. [Trading of the sheep industry]. In: Magyar Juhászat [Hungarian Sheep Breeding], Budapest, 1997/5: 6-7.

1 There are numerous categories of value of production, costs of production and income. In this study we do not intended to interpret these categories, but to set the guidelines of their calculation.