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.

TX 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 US Cattle Inventory “Economic History of the Cattle Industry According to … ”

“Real” Retail Price of Beef Domestic Production Tons of Beef 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 andB. 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!

Systems Preg % Semen Costs $3/Unit $13/Unit $23/Unit Labor Cost ($/hour) CoSync Co Sync Co Sync SelSync SelSync SelSync 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 D1D1 Technology D2D2

Marginal Price Curve, Firm Price per Unit, $ Units of Outputs D1D1 Technology D2D2

Marginal Price Curve, Industry Units of Outputs Price per Unit, $ D1D1 D2D2 Technology

Marginal Price Curve, Industry Units of Outputs Price per Unit, $ D1D1 Technology D2D2

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 – V n = V 0 (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 Cow NPV, Current Market NPV, Low Point Market Remaining Life (yr)$ , , , , , , , NPV for Cattle of Ages 1- 12yr for 2 Market Scenarios (Meek, et al, 1999)

Real $ Retail Beef Net Present Value Beef Production Cattle Cycle Cyclical Drought 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