Technology: Price Tag and Profit

2004 Beef Improvement Federation

Barry H. Dunn, Ph.D.Executive Director and Endowed Chair

King Ranch Institute for Ranch Management

Texas A&M University Kingsville

Technology

Any device, service, product, medicine, vaccination, …

and now as industry production segments become aligned, any specific procedure or protocol

Adoption Rates

• Relatively low rates when compared to competitors, NAHMS, 1998

• Rates vary between segments• Rates vary within segments• Market signals are changing rapidly!

– Consumer preference– Animal health issues– Trade

• People exhibit different patterns

- X Cattle Co.

TX001256783245 Cattle Co.

Technologies

• AI• Estrus Synchronization• Supplementation• Breeding Systems• Herd Health• Growth Promotants• Embryo Transfer• Cloning• Animal ID

Technology and Profitability Obvious Correlation?

• Ranch A: Extensive– Round up & market

1 X a year– Limited vaccination– Year round breeding– Unplanned X breeding– No dehorning– No individual ID– Little or no

supplementation

• Ranch B: Intensive– ID– Full array of vaccines– Limited breeding

season– Planned X-breeding– Implants– Balanced rations &

supplementation– AI & Estrus Synchro– Strategic marketing – Retained ownership

Technology and Profitability Obvious Correlation?

• Ranch C: Chosen– Single Breed– Extensive vaccination– Synchronization – AI Breeding– Individual ID– Planned

supplementation– No implants– Targeted market

Influencers

• Dr. Chris Dinkel• Dr. Wayne Purcell• Dr. Harlan Hughes• Dr. John Lawrence• Dr. Tom Jenkins• Dr. Eddie Hamilton• Dr. John Sterman• Professor Jay Forrestor• M. B. Johnson

“Real” Retail Price of Beef

Domestic Production Tons of Beef

1974 2004

US Cattle Inventory

“Economic History of the Cattle Industry According to … ”

“Real” Retail Price of Beef

Domestic Production Tons of Beef

1974 2004

US Cattle Inventory

“Economic History of the Cattle Industry According to Me”

Goals for Today:To put the $ of Technology in Context

1. Partial Budgets are partial budgets

2. Measuring impact at the payoff point

3. Costs and benefits change with different levels of production

4. Impact can be different on firm vs. industry

5. Unexpected outcomes shouldn’t be unexpected

6. The future value of technology needs to be discounted

Most Widely Used Tool in Evaluation

Partial Budget

Technology:

Additional Costs: Additional Revenues:

Reduced Revenue: Reduced Costs:

A. Total additional costs and B. Total additional revenues and

reduced revenue $ reduced costs $

Net Change in Profit (B-A)

Positives and Limitations

• Positive:– Easy to use– Straight forward– Shows costs and

benefits

• Doesn’t Measure:– Risk– Affect on Cash Flow– Quality of Life– Inter-relationships– Fixed costs are often

understated or ignored

– Unexpected outcomes

– Efficiency

In the Partial Budget process:• Variable Costs are most commonly

evaluated:– Often on a per head basis

• BUT, how much did the technology change pounds available to sell?

• AND, what did it cost per cwt. sold?• BECAUSE, small changes can get washed out

over time.

• Changes in Fixed Costs are often glossed over!

Where to Measure Impact?At the end of the production cycle!

• Impact of calf-hood implant on a yearling?• Value of using a sire with superior carcass

traits to an operation that sells at weaning?• Benefits of estrus synchronization?

– # of females: cycling, bred, Preg., Calving in days?– %of females: cycling, bred, Preg.?– Lbs weaned per cow exposed?– Value of uniformity?– Value of future benefits?

The Correct End Point?The Point of Sale!

• Correct Feedback is Critical!– For example: Fixed costs are

$100/Beginning Year Breeding Female– If you can produce the same # of weaned

pounds with 10% fewer cows:• Fixed costs per cow go up!• Fixed costs per cwt remain the same!

SystemsPreg

%

Semen Costs

$3/Unit $13/Unit $23/Unit

Labor Cost ($/hour)

5.77 10.77 15.77 5.77 10.77 15.77 5.77 10.77 15.77

CoSync 40 7.82 8.31 8.81 10.5 10.97 11.47 13.13 13.63 14.13

Co Sync 50 5.36 5.85 6.35 8.01 8.51 9.01 10.67 11.17 11.67

Co Sync 60 4.84 5.34 5.83 7.50 8.00 8.49 10.16 10.65 11.15

SelSync 40 7.04 7.90 8.76 8.56 9.42 10.28 10.08 10.94 11.80

SelSync 50 4.71 5.57 6.43 6.61 7.47 8.33 8.51 9.37 10.23

SelSync 60 4.33 5.19 6.05 6.61 7.47 8.33 8.89 9.75 10.61

500 lb Equivalent Weaned Calf Breeding Costs per cwt for a Herd Size of 100 at Various Labor and Semen Costs.

(Johnson, 2002)

Marginality

Units of Input

Units of Output

Marginal Cost Curve

Units of Outputs

Marginal Cost, $

Marginal Price Curve, Firm

Price per Unit, $

Units of Outputs

D1 Technology

D2

Marginal Price Curve, Firm

Price per Unit, $

Units of Outputs

D1

Technology

D2

Marginal Price Curve, Industry

Units of Outputs

Price per Unit, $

D1

D2

Technology

Marginal Price Curve, Industry

Units of Outputs

Price per Unit, $

D1

Technology

D2

Unexpected Outcomes

• Growth Implants : European Embargo

• Weaning Weight : Dystocia

• Bacterial Resistance to Antibiotics

• Inbreeding : Lethal Traits

• Crossbreeding : Longevity

• Positive Associative Affect

• Carbohydrates : Obesity

Dystocia+

Weaning Weight

Total Lbs Weaned

+

-Calf Death Loss

+

B

Causal Loop Diagram

Birth Weight

+

+

R

The Future Value of Today's Technology

• Because of extended production cycle, our industry needs to use “Net Present Value” as we evaluate change– Vn = V0 (1 + i )n

– Used extensively in planning scenarios– Relies heavily on accurate data and trend

analysis– Responsibility of….?

• Provider of technology• User of technology

Age of CowNPV, Current

Market

NPV, Low Point

MarketRemaining Life

(yr) $ (yr)

1 783.53 599.69 4

2 1,026.86 794.36 4

3 1,145.81 909.78 5

4 1,210.20 954.46 6

5 1,170.59 936.69 6

6 1,088.04 874.93 5

7 1,068.73 853.35 5

8 1,027.38 797.32 5

9 979.12 714.82 4

10 899.87 612.88 4

11 794.09 480.57 3

12 734.60 431.32 2

NPV for Cattle of Ages 1- 12yr for 2 Market Scenarios (Meek, et al, 1999)

Real $ Retail Beef

Net Present Value

BeefProduction

Cattle Cycle

CyclicalDrought

Competing Meats

A Systems Approach

• Describe the situation

• Examine mental models

• Measure and define criteria – Place things in context!

• Use Causal Loop Diagrams

• Develop simulation models

Summary

Technologies need to be placed in context!

• Partial Budgets are partial budgets • Measure impact at the payoff point• Costs and benefits change with different levels of

production • Impact can be different on firm vs. industry• Unexpected outcomes shouldn’t be unexpected• The future value of technology needs to be

discounted

The Challenge

Technology can be used not only to increase and improve:– Production– Efficiency– Consumer Acceptance

But also to: – Improve Nutritive Value– Address Environmental Challenges