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