|Estimating returns from past investment into beef cattle genetic technologies in Australia
Meat and Livestock Australia (MLA) commissioned an economic evaluation of the returns from beef cattle genetics research and development (R&D) in Australia. For the purposes of this analysis, genetics R&D was defined to include all breed manipulation, including selection, crossbreeding and grading up or breed substitution. R&D within Australia was also defined to include the effects of imported genetics. This is a revision of a report originally submitted to MLA in May 2002 (Farquharson, Griffith and Barwick 2002).
Evaluations of returns from three different types of gains have been included in this report. The first result is that investment in genetic selection and southern crossbreeding has shown healthy returns. These particular investments have realised a net present value (NPV) of $861 million (and a benefit cost ratio (BCR) of 3.6 and an internal rate of return (IRR) of 19 per cent). These are net social benefits expressed in 2001 dollars, and they apply to producers and others in the beef industry as well as to consumers of beef products. Second, an evaluation of the benefits from infusing Bos indicus cattle into the northern Australian herd resulted in net benefits of $8.1 billion, and finally, an evaluation of the changing herd breed composition in southern Australia (in terms of Angus cattle) showed a net benefit of $62 million. These last two figures are in addition to the results for genetic selection and southern crossbreeding. A 7 per cent discount rate was used in this analysis.
The total cumulative present value (PV) of investments to 2001 by industry, government and other agencies into selection, crossbreeding and grading up since 1963 was estimated to be $310 million. The split between research and extension was not provided by a number of agencies, so that it was not possible to calculate separate returns to these activities. The cumulative PV of imported semen was estimated to be $27 million.
These investments were made by state government agencies (Departments of Agriculture) (50 per cent), by MLA and its predecessors (25 per cent), by Breed Societies and beef producers (16 per cent), and by CSIRO and the Beef Cooperative Research Centre (CRC) (9 per cent).
Information on numbers of cattle evaluated within the BREEDPLAN program was difficult to document. Information on registrations was derived from the Australian Registered Cattle Breeders Association (ARCBA), but this is not the same as evaluations, and is likely to overestimate evaluations. Information on evaluations by sire and breed is presented for certain breeds based on the BREEDPLAN database.
Genetic trends were derived from BREEDPLAN Estimated Breeding Values (EBV) information for seedstock animals within breeds. The BreedObject software was used to translate these numbers into seedstock EBVs for commercial herd traits. Averages of these by year of birth of seedstock bull were used to measure genetic change (or trends). Genetic change was assumed to occur in the commercial sector at the same rate as in the seedstock sector, but lagged by 5 years for herds using BREEDPLAN bulls, and lagged by 10 years for those using non-BREEDPLAN bulls.
Genetic trends in index traits were calculated for sale liveweight (kg), dressing percentage (%), carcase meat percentage (%), fat depth (mm), cow weaning rate (%), marbling score, cow survival rate (%), cow liveweight (kg) and calving ease (%). The predicted trait trends at 5-year intervals from 1985 to 2005 for the main breed x market combinations were assessed. Significant genetic trends were only observed for progeny liveweight and cow weight. Other trait trends were either not statistically different from zero or not significant enough to include in farm-level budgets. No evidence of feed conversion efficiency was provided, and no improvements in feed conversion ratio to offset larger cattle sizes were included in the analysis.
Estimates were made of the proportions of the beef cattle population according to bull breed, cow type, market orientation (domestic or export) and market type (eg supermarket). Aggregate benefits were derived using these proportions to weight the benefits estimated from trait trends.
This detailed breed x market classification was represented by six different cases, termed domestic high recording, domestic moderate recording, export high recording, export moderate recording, European and northern.
The genetic trends and herd x market case proportions were used to assess potential gains from selection and crossbreeding, however actual market capture may be less than predicted. Environmental and market factors are very important in determining technology capture or uptake by commercial industry.
Non-adopters also benefit from general breed improvement (through the general availability of better bulls), but later. This was included in the analysis.
An Equilibrium Displacement Model (EDM) of the Australian beef industry was used for the evaluations. This has been developed to evaluate relative returns to beef producers, processors and consumers from on-farm versus off-farm R&D. The general approach is widely used by agricultural economists in evaluating economic returns from different types of investments (including promotion). The model has a horizontal and vertical representation of the industry sectors and markets. It incorporates prices and quantities, and supply and demand elasticities, so that any interactions within and between market sectors are represented. The model is based on actual data for the Australian beef industry.
This framework represents technological change as a percentage change in variable costs per unit of output, which is interpreted within the model as influencing the supply of beef product. The genetic trend impacts were incorporated into Gross Margin budgets for market x production system cases to calculate the relevant changes in variable costs. Extra feed costs associated with the larger animals were calculated using the BEEF-N-OMICS program together with estimates of improved pasture costs and stocking rates. Because no feed conversion efficiency gains were observed, the larger animals required more feed and so the extra costs that accompanied it were included.
If all of the R&D investments were applied only to selection and cross-breeding, the estimated returns to these investments were $1199 million. So these R&D activities show a healthy return to investment - an NPV of $861 million, a BCR of 3.6 and an IRR of 19 per cent.
Previous results from this economic model showed that a 1 per cent reduction in variable costs (shift in supply) at the farm level results in a $30 million change in economic surplus (to both consumers and producers), expressed in 2001-dollar terms. These analyses have also shown that about 33 per cent of gains from on-farm technologies accrue to farmers (weaner producers, grass finishers and backgrounders), and domestic consumers receive 50 per cent or more of the gains.
Applying these proportions to the 2001 NPV figure of $861 million, beef producers are likely to have benefited by up to $287 million and domestic consumers by $431 million or more in PV terms from past investments in beef cattle selection and crossbreeding R&D.
Using a different method, the cumulative NPV of infusing Bos indicus genes in the northern herd since 1970 is estimated at $8.1 billion. It has been estimated as the extra profit to the producer resulting from an increase in the Bos indicus proportion of the northern herd from 5 per cent in 1970 to 85 per cent in the 1990s, evaluated at an on-property benefit of $87/adult equivalent/year (2001 dollars). This estimate was based on simulations with the BREEDCOW software. The estimated cow population over the period has also been incorporated.
Using a willingness-to-pay methodology and the EDM, the benefits from changing breed composition in the southern herd during the 1990s has been estimated at $62 million. This is basically estimating a premium for Angus cattle. The percentage of southern slaughter that has been Angus-influenced has risen from 9.5 per cent to 22 per cent since 1990. The $62 million figure was derived using an assumed premium of $25 per slaughtered animal, values for these animals from the relevant gross margin budgets, and beef population estimates.
While the initial benefit of the breed change in the north accrues to the producer, over time the benefit will be distributed across all sectors of the industry.
Longer term breed changes and benefits from other breeds (eg European breeds) have not been evaluated.
The estimated returns on investments in beef cattle genetics R&D have been healthy. In addition the cumulative nature of genetic gain means that the benefits will continue into the future, and are expected to grow.