The arrival of winter in the country brings with it some changes in the weather that are common to the season, and raises some concerns about its impact on agricultural activities. Phenomena such as drought and frost in certain regions can lead to the loss of large areas of cultivation, as they cannot withstand such weather conditions. The impact of the availability of these ingredients on the market leads to an increase in the price of essential inputs such as soy and corn, and this has a direct impact on the production of agricultural factories and rural producers, who depend on the supply of these inputs.
The resulting impacts of such seasonal changes (ie changes typical for a particular season or time of year) are just one example of external factors that can alter the supply or cost of raw materials. For this reason, it is always very important to devise strategies for your business that aim to circumvent these obstacles, so that your production is impacted as little as possible. Industry-focused formulation programs allow you to analyze the use of alternative ingredients in your formula based on the impact of price swings and target purchase price – and we’re going to talk a little bit here about how that can help your production and yield.
But first, in more concrete terms…
According to projections by the Brazilian Association of Animal Protein (ABPA), the price of chickens and pigs may increase by up to 50% this year. This increase is due to the increase in production costs of these products in the last year, calculated by the Production Cost Index, or ICP. In the case of pigs, the increase in the ICP can exceed 47%, being even greater for chickens, where the rate of increase can exceed 52%.
But what explains such an increase? Precisely the rise in prices of raw materials such as soybean meal and corn, essential ingredients for poultry and swine nutrition. This is because animal nutrition costs represent the highest rates of production expenses: 75% for chickens, and around 80% for swine.
This increase also ends up being felt by the consumer, since production costs are passed on and influence the rise in the final price of chickens and pork. According to Ricardo Santin, president of ABPA, “as stocks of corn and soybean meal, purchased at a lower price last year, run out, chicken and swine breeders, farms and companies will have to purchase grains at the current price , much more expensive, and then they will pass on the costs” (link to article).
And that’s where the strategy of considering alternative ingredients for your formula comes in.
First of all, it is important to emphasize that there are several external factors that can influence the price fluctuation of an agricultural input, among which seasonal phenomena such as drought and frost are just some of them. Dollar quotation and foreign market demand are other reasons that can lead to this fluctuation. That is why it is so important to develop a production strategy that takes into account this price volatility, and that always seeks the most economically viable option for your company.
Formulation software can help you with this. You can easily analyze the use of alternative ingredients in your formula based on price fluctuations through the impact this would have on the consumption level and composition of your product. In addition, the software will indicate the actual target price for you to use in your negotiations, being able to analyze quotations clearly, question suppliers regarding discounts, deviations from the target price or the general average of the supplier market, in addition to implementing quality and variability of composition with the most effective suppliers.
Both the analysis of the impact of price fluctuation, as well as the definition of the target price, help factories and producers to make a more effective decision based on data, in order to implement a purchasing strategy that maximizes, provides security and increases the effectiveness of their operations. . Let’s talk a little more about these processes:
1. Impacts of price and quantity fluctuations of raw material on your product
The main objective of Parametric Analysis is to inform possible alternative compositions for its formula based on price fluctuations, aiming at the most viable option for its production. In other words, the Parametric Analysis function informs…
…what is the optimal purchase price of a given raw material from which its use becomes viable within the formulas and in what quantity.
With this function, the user can design different scenarios to continue guaranteeing the quality and nutritional requirements of their products that maximize their profitability at the lowest possible cost, based on the expected price variations for that ingredient.
The process works as follows:
➜ You can inform a range of variation in the cost of a certain raw material used in your product, defining, for example, a maximum cost for that product to be competitive in the its formula, or that is in accordance with market forecasts.
➜ You then define an increment value for the product price. This is a fixed value, which will be added successively and cumulatively within that range of previously defined minimum and maximum values.
➜ And that’s it. The Parametric Analysis function reformulates your product so that you can observe possible consumption levels that continue to make your formula viable, but with lower costs according to each projected price range.
Each of these compositions indicates different percentages to be used of the analyzed ingredient, determined by its price, as well as the percentages of other ingredients that could be used alternatively. That’s because some ingredients could maintain the same nutritional quality, at a lower price.
2. Target price definition to maximize profitability
We know that target price, or target cost, is not just a costing method within companies, but a strategic management technique for creating value products with always higher margins. Prices can be determined based on market conditions and other factors, such as level of competition, changing costs, scarcity of raw materials, among others. Thus, the formulator and the purchasing department have important tools to know how much the company could pay for a product to be used in production and to reduce operating costs.
In formulation systems, the target price is information given from the data entered by the user and the results of formula optimization. It shows exactly the ideal cost of purchasing an ingredient so that a certain amount of use is used in the formulation in the most economically viable way possible.
The formulator, in order to optimize a ration, must enter the raw materials that will potentially be used in the formula, together with their respective purchase prices and any minimum and maximum percentages of use of these raw materials, forming a nutritional design and specification. of the formula. Based on this information, the software calculates the ideal price of a raw material in the formula.
This information is important, for example, when using ingredients that the system did not initially include in the formula because they did not have a price already defined or because they were not available at the time of blending, …
…indicating what should be the ideal purchase price that each one would need to have to be included and in what percentage they could be used.
The main benefit of knowing the target price of possible alternative ingredients for your formula is to strengthen your formulation strategy and make sure you have all of your choices. With this information, in the event of a shortage or major fluctuation of a main ingredient in your feed, you can choose other alternatives that maintain the same nutritional level and guarantee the same performance of the animal, at the same time that can significantly reduce your costs. of purchase and production.
The recent financial crises and an increasingly competitive market, with consumers demanding increasingly superior quality, have put enormous pressure on companies and producers to reduce operating costs. Thus, an efficient strategy for considering alternative ingredients can optimize and cheapen their nutrition, production and animal formulation.
Whether the loss of the harvest due to the impacts of drought and frost, and consequently the shortage of supply of this ingredient; either the scarcity of this ingredient due to the increase in demand by other countries in the foreign market; in other words, its overbilling due to fluctuations in the dollar rate. It is always very important that factories and producers in the area of animal nutrition develop a strategy that includes the consideration of alternative ingredients in their production. Assured that they maintain the same nutritional level as the formula, and that there are no losses in their performance in the animal diet, the use of alternative ingredients can significantly reduce your costs linked to the operational cycle.
