Considering the Net Present Value of Dairy Cattle as by lpx20272


									Considering the Net Present Value of Dairy Cattle

         as an Aid in Downsizing a Dairy

                      Erin Goodrich

            Advisor: Daryl Nydam DVM, PhD

                     Senior Seminar

     Cornell University College of Veterinary Medicine

                     October 3, 2007

       Various tools are available today to aid in the culling decisions that dairy producers are

faced with on a daily basis. In order to objectively and economically cull cattle in a manner that

is profitable for the dairy farm, it is essential to consider some basic health and production

parameters. Determining the net present value of a dairy cow is valuable for decisions made on

farm that have more than a year time horizon. It is important to consider aspects such as current

and future milk production, reproductive status and health events. Current applications assess

the net present value of a dairy cow in relation to that of an average fresh heifer to determine

whether replacement would be more profitable. Using Dairy Comp 305, an on-farm

computerized record analysis system, I analyzed various components used to determine the

relative net present values of dairy cattle for a local dairy farm, McGarr Farms, currently

interested in substantially downsizing their herd. This gave the producer a guideline to use when

selecting cows to cull while transitioning down to a smaller herd size.

Herd Demographics and Goals:

       McGarr Farms is a dairy farm located in Cayuga County, New York. They currently

milk about 425 Holstein dairy cows two times a day. They also maintain a small show herd

consisting of about a dozen cows. The cattle are housed in freestall barns and fed a total mixed

ration. The dairy is currently undergoing a transition in which the daughter is gradually taking

over the farm from her father and has new goals for the future. She wants to downsize the

milking herd to about 250 cows. She wishes to maintain the show cow herd and make better use

of her pastures by utilizing rotational grazing for 100% of the remaining herd. In doing so, this

will decrease input costs by reducing feed costs and therefore aid in maintaining or improving

Erin Goodrich                                                                                       2
profitability while milking fewer cattle. Her main goal for the future is to begin processing fluid

milk on the farm within the next year and possibly make cheese or yogurt on the farm in the

more distant future.

       There are many dairy farms currently undergoing transitions to maintain or improve

profitability. Many dairy producers are forced to expand their herd size. Input costs such as feed

and labor increase along with inflation while the milk price tends to remain level and does not

often increase at the same rate as inflation. For this reason, producers are often forced to make

more milk per farm in order maintain the same or greater profitability over time. Another option

for improving profitability on the farm can include capturing a niche market. The owners of

McGarr Farms are hoping to achieve this by processing fluid milk on the farm and downsizing

their herd. Their problem arises in deciding which cows to sell in order to achieve their goals

and maintain the optimal level of profitability in the remaining herd.

Considering Net Present Value of Decisions on a Dairy:

       Commercial dairy producers are constantly forced to make decisions concerning their

livestock based on profitability. Decisions regarding which cows to treat, breed, or cull are made

everyday. Some decisions are immediate and have abrupt consequences. Culling decisions,

however, are made now but have consequences affecting cash flows in the more distant future.

The time horizon of the decision refers to the period for which the economic analysis is

undertaken. Once the time horizon becomes greater than one year, the time value of money must

be considered. In general, money received now is better than money received in the future.

Money to be received in the future is a high-risk prospect. Also, money received today is worth

Erin Goodrich                                                                                       3
more than the same amount in the future because of the opportunities for investment and other

alternative uses (Marsh, 1999).

       Future cash flows must be discounted to present values when the revenue stream is

greater than one year in order to make good economic decisions on farms. The term “discount

rate” describes the interest rate. Therefore, the higher the discount rate, the lower the present

value of future cash flows. Discounting a future value into a present value allows you to

compare that future cash flow to its present day equivalent (Marsh, 1999). Choosing an

appropriate discount rate can be difficult but a good starting point is to use the nominal interest

rate minus the inflation rate. The equation for calculating the present value is as follows:

PV=Xn/(1+r)n, where PV=present value, X= amount of money in year n, n = the number of

periods (often years) from present, and r = the periodic discount rate as a decimal. Likewise, the

net present value can be calculated as follows: NPV=∑(Rn/(1+r)n) - ∑(En/(1+r)n), where

NPV=net present value, ∑=sum of all the period’s revenues and expenses, R=amount of

revenues in year n, E=amount of expenses in year n, r = the periodic discount rate as a decimal,

and n = the number of periods (often years) from present (Marsh, 1999). Therefore, to make use

of these equations when making culling decisions, you need to have an estimate of the amount of

money that cow is likely to make for the farm over the given period, n. You also need to

consider the discount rate and the expenses over that period.

       In general, net present value is a term used to assess the financial appraisal of long-term

projects. It is an indicator of how much value an investment adds to or subtracts from the total

value of a business. Therefore, the net present value of a dairy cow must account for all the

income she adds to the farm as well as the costs she accrues while achieving her production

level. To arrive at an estimate of this value, several factors must be taken into account including

Erin Goodrich                                                                                         4
current and future milk production, health events, reproductive status, milk price, cull cow price,

replacement cost and replacement availability.

Using Net Present Value to Make Culling Decisions on a Dairy:

        Dairy Comp 305 is an on-farm computerized record system. “COWVAL” is a module

within Dairy Comp 305 that estimates the value of an individual dairy cow in relation to that of

an average producing fresh heifer based on that herd’s performance (Sorge et al, 2007). Certain

assumptions are made in order to calculate COWVAL, including the dairy farm is operating at

capacity, all cows are eventually replaced, all cows are replaced with an average fresh heifer, and

all dairy decisions are made on a financial basis. COWVAL considers “slots” on a dairy. A slot

is “a place where a unit of production exists and can be accounted for” (Nydam, 2007). For

instance, in a freestall barn, a slot is an individual stall within that barn. In a dry lot dairy, a slot

is an individual space in that dry lot. The most profitable cow must be put into each slot to

maintain optimal profitability of the herd. This means that a cow should be removed from her

slot if a more profitable cow can replace her. COWVAL considers both herd-level factors and

cow-level factors in its calculation. Some of the cow-level factors used include age of cow,

stage of lactation, reproductive status, and production level. Herd-level factors considered

include costs of feed and replacement heifers, cull price, milk price, discount rate, detection of

estrus and conception rates, voluntary waiting period, average days open, culling risk, and annual

milk production and milk curve persistency for lactations 1, 2, and ≥ 3 (Sorge et al, 2007).

COWVAL uses the net present value as a means of assigning value to individual cows on a farm.

It is a difference, not an absolute value. It is equal to the net present value of the slot with the

current cow and her replacements minus the net present value of that slot occupied today by the

Erin Goodrich                                                                                               5
average fresh heifer and her replacements (Nydam, 2007). A positive value indicates that cow is

probably worth keeping in that slot while a negative value means you should consider replacing


       In order to estimate the current value of a lactating dairy cow, one must know the sum of

her value for beef as well as the value of her future milk production. Her value for beef can be

estimated based on the current market value. Her future asset to the farm is obviously not known

but can be estimated based on the amount of milk that she is likely to produce, the price of that

milk in the future, and the value of the money needed to invest in her to gain that production.

The amount of milk she will likely make in the future may be estimated based on her age, stage

of lactation, reproductive status and current production level (Eicker, 2007). Younger animals

are more likely to stay in the herd longer and therefore produce more milk. Animals in early

lactation are likely to produce more milk in the future than animals in late lactation. Pregnant

animals are likely to produce more milk in the future than animals that are not pregnant.

Likewise, an animal who has been bred is more likely to become pregnant and therefore to make

more milk. Also, a high producing cow is likely to make more future milk than her lower

producing counterparts (Eicker, 2007).

       The reproductive status of a dairy cow is an important factor in the determination of her

net present value and is therefore an important part of the COWVAL calculation. Maximizing

reproductive performance is economically advantageous as the estimated value of a pregnancy

loss is over $500 (De Vries, 2006). In early lactation as days in milk increase, the value of that

pregnancy also increases. Therefore, the earlier a pregnancy is detected, the less likely that cow

will be culled (De Vries, 2006). Likewise, the cost of pregnancy loss increases with gestation

length. The cost of days open beyond 150 days in milk ranges from $1.50 to $2.50 per cow per

Erin Goodrich                                                                                        6
day increasing later in lactation (Meadows et al, 2005). Several factors have been found to

greatly decrease the average value of pregnancy including increased persistency of lactation,

increased probability of pregnancy and decreased replacement heifer cost. Changes in milk price

and milk yield affect this value to a lesser extent. Estimated future milk yield of individual cows

also affects the value of their pregnancies (De Vries, 2006).

Considerations of Health Events When Culling Cows:

        Other considerations regarding the net present value of a dairy cow include health

parameters. Mastitis in dairy cows is the most detrimental disease in regards to negative effects

on herd productivity (Booth et al, 2004). Both clinical and subclinical mastitis (high somatic cell

counts not associated with clinical signs of disease) are associated with decreased milk yield.

The daily and overall milk loss associated with clinical mastitis varies depending on when in

lactation the disease occurs (Rajala-Schultz et al, 1999). Losses of milk production are reported

to be about 5% of the lactation (depending on parity). Surprisingly, while milk production is

highest in early lactation, the milk losses due to mastitis is greatest in later stages of lactation (for

parities greater than 1) (Seegers et al, 2003). Although it is known that fat and protein yields are

decreased in the presence of intramammary infection, the quantification of these component

losses is still unclear. Fat yields are depressed due to a reduction in overall milk volume but it is

not known whether every mastitis case gives a decrease in the fat content of the 4-quarter milk

(Seegers et al, 2003). Mastitis also has long lasting effects on production so that cows are often

unable to reach their premastitis milk yield during the rest of the lactation following a mastitis

event (Rajala-schultz et al, 1999). Mastitis is not only economically devastating due to the loss

in production associated with the disease but also because of the cost associated with

Erin Goodrich                                                                                          7
implementation of a control and/or treatment program. Such costs include discarded milk due to

treatment, medical associated costs and added labor.

        Likewise, mastitis can also be costly due to increased acute mortality and decreased

longevity that often accompanies infection with certain organisms. Increased fatality rates are

often associated with a high incidence of Gram-negative bacteria induced clinical cases. The

risk of being more rapidly culled after clinical mastitis exists for all stages of lactation, however,

cases occurring in early lactation and during the dry period are associated with the highest risk.

They show that cows are 1.5 to 5 times more likely to be culled following the occurrence of a

clinical case of mastitis or a high somatic cell count based mostly on the current and future

anticipated milk loss (Seegers et al, 2003).

       The second most detrimental disease resulting in diminished productivity of dairy cows is

lameness (Booth et al, 2004). Lameness is a disease frequently seen with animals housed on

concrete. Each lameness case costs approximately $404. About $5 of this comes from discarded

milk, about $50 is due to milk that’s never made and about $200 is due to the increased cull risk

associated with lameness (Guard, 2007). Lameness events have a negative impact on milk

production in spite of treatment. One study found that lame cows produced 1.5kg/d less milk

two weeks after a lameness event as compared to cows not diagnosed lame (Warnick et al,

2001). There was a greater decrease in milk production associated with lameness for cows in

second or greater lactation and also for more severe lameness cases. Survival in the herd is

decreased for cows becoming lame in the first half of their lactation, especially due to foot rot

and sole ulcers. Lameness also contributes to diminished fertility, increased risk of culling,

substantial treatment costs and increased labor (Booth et al, 2004). Along with the above

Erin Goodrich                                                                                        8
economic losses associated with lameness there are important welfare concerns due to the

obvious visual nature of the disease.

       Determining the net present value of an individual dairy cow is a complex task involving

many parameters that serves as a useful tool for making culling decisions based on profitability

of the herd. The primary reasons dairy farmers choose to cull a cow are based on reproductive

problems (i.e., failure to conceive), mastitis, and low production but variation exists across farms

(Bascom et al, 1998). Culling cows due to mastitis or low milk production occurs less frequently

in high producing herds, whereas culling cows due to abortion is higher in these herds. Most

cows are removed from herds only after they have displayed several of the above indicators for

culling. Along with these parameters, producers consider age, stage of lactation, disposition,

milk price, price of a cull cow, replacement cost and availability of replacements. Replacement

heifer costs are one of the most significant contributors to the expenses of dairy production

(Eicker, 2007). Other more subjective considerations are also appropriate as producers with

similar resources but different objectives will make different culling decisions to meet their

unique goals. These goals reflect the dynamics of the dairy industry and can include planned

fluctuations in herd size. For instance, dairies undergoing expansion often experience increased

pressure to manage cash flow by minimizing their cull rate in order to function at or near full

capacity. Selective culling can still occur in the midst of expansion and is facilitated by

improving pregnancy rate and heifer calf survival whenever possible. Getting more cows

pregnant increases the number of calves born, inevitably decreasing the need to cull cows for

reproductive purposes. Although the optimal pregnancy rate is 30%, dairies in the Northeast

average 14-15% (Overton, 2006). Thus, improving heat detection and instituting a

synchronization program may be beneficial.

Erin Goodrich                                                                                      9
Making Decisions on McGarr’s Dairy:

        In order to aid the McGarr’s in their culling decisions, I utilized Dairy Comp 305 to

analyze their herd’s most recent health and production data. I analyzed COWVAL, as well as

previous and current lameness events and previous and current clinical and subclinical mastitis

events for each cow in the herd. In order to use COWVAL, I first had to “edit parameters” in

Dairy Comp 305 (Figure 1). This entails entering farm-specific values into the computer so that

the correct numbers are used in the calculation. I entered McGarr’s heat detection rate,

conception rate, voluntary wait period, and average days open, as well as the current heifer cost,

cull cow value, milk price, marginal feed cost, and discount rate. COWVAL utilized this

information along with lactation, milk production, reproductive status, and days in milk to then

assign a value to each cow in the herd. COWVAL also provides summary data including a cull

milk value which is the cutoff production level for culling (Figure 2). Other data included are

the replacement cost, number of heifers in inventory, number of cows with a negative COWVAL

and the number with a positive COWVAL as well as the mean COWVAL for the adult animals

in the herd. COWVAL does have limitations, however, including the fact that it is not a robust

tool for fresh cows less than 60 days in milk. Within the first 60 to 90 days in milk COWVAL is

unstable and extremely variable even within a single cow. For this reason, during the first 60

days in milk, dairy producers should rely more on the test results of the previous lactation and

include more than one COWVAL result to more accurately judge the value of each cow (Sorge

et al, 2007).

        In order to assess subclinical and chronic mastitis infections for each cow, I looked at

linear scores and previous linear scores. To assess clinical mastitis, I analyzed the number of

Erin Goodrich                                                                                      10
milk culture events for each cow. Finally, to assess lameness, I created an item that calculated

the number of days since the last block was placed on a foot for each cow in the herd. I used this

as an indirect measure of lameness. Once all of the information was gathered and put into a

spreadsheet format, I was able to analyze it and assign points based on negative current and past

health events and low COWVAL values. I then totaled the points to arrive at a value for each

cow so that the highest point values were assigned to the least valuable animals in the herd

(Figure 3). I presented the information to the owners of McGarr Farms. They were able to use

this information, along with their own intuition regarding specific cows in the herd to formulate a

list of animals to be sold at the public auction.


       Although culling decisions are extremely important to the economic performance of the

dairy, they are still often made in a subjective fashion based largely on the intuition of the

producer. In some instances, culling decisions are obvious and intuition on the part of the

producer can be an effective tool. In other cases, however, culling decisions are less obvious and

a more objective assessment of each cow’s worth is useful in the decision process. Determining

the net present value of a dairy cow is a very complex task but tools such as COWVAL can aid

in the process. Accurate and complete herd records are a necessity. In order to be objective,

formulating a protocol centered on health and production parameters when making culling

decisions is very useful. It is ultimately necessary to integrate intuition with objectivity to make

the most profitable decisions on the dairy farm.

Erin Goodrich                                                                                      11
                                                                              (Nydam, 2007)

Figure 1. In order to utilize COWVAL on DC 305, you need to first “edit the parameters.” This
allows you to tailor the tool to the specific farm by entering the corresponding heat detection
rate, conception rate, etc for that farm. It also allows you to enter the current cull cow price,
heifer price, and milk price so that it can use these in the calculation. This process is
demonstrated for a sample farm in the image above.

                                                                              (Nydam, 2007)

Figure 2. Above is an example of the COWVAL summary screen provided in Dairy Comp 305.
The summary data provided includes a cull milk value which is the cutoff production level for
culling (below which that cow is no longer making a profit in the herd). It also includes the
replacement cost, number of heifers in inventory, number of cows with a negative COWVAL
and the number with a positive COWVAL as well as the mean COWVAL for the adult animals
in the herd.

Erin Goodrich                                                                                 12
Figure 3. A small portion of the Excel spreadsheet that I made for the McGarr’s. I analyzed
COWVAL (Cwval) for each cow to interpret the relative worth to McGarr’s herd based on all of
the parameters mentioned above (parity, production, reproductive status, milk price, heifer price,
cull cow price, etc). I also considered some milk quality parameters to judge each cow’s
contribution to mastitis in the herd. Linear score (LS) and previous linear score (PLOG) are
useful measures for detecting subclinical mastitis and chronically infected cows. The number of
milk culture events (NCULT) indicate clinical mastitis events in that cow’s past. To look at
lameness events for each cow, I looked at how many days it had been since that cow received a
block on her foot (DSBLK). If 0, I knew that that cow never received a block and she was
therefore valued higher than those cows who had received blocks in the past. In the end, the
cows received points based on negative aspects (Sum of points). The points were tallied for each
cow and provided a value for each cow in relation to her herdmates. I also included a place
where McGarr’s could place emphasis on different measures depending on their own interests
and goals (Yellow highlighted portion in upper right). By changing the weight that each measure
is worth, the overall point values change as well (Weighted points). This was the tool that I
provided McGarr farms with to aid in their culling decisions.

Erin Goodrich                                                                                  13

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Erin Goodrich                                                                                   14

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