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Economic analysis of crossbreeding dairy cattle
Agricultural
PII:
SO308-521X(96)00068-6
Systems, Vol. 54, No. 3 pp. 327-339, 1997 0 1997 Published by Elsevier Science Ltd All rights reserved. Printed in Great Britain 0308-521X/97 $17.00+0.00
ELSEVIER
Economic Analysis of Crossbreeding Dairy Cattle Kisan Gunjal,” Louis Menardb
& Ramaradj
Shanmugam”
ODepartment of Agricultural Economics, Macdonald campus of McGill University, Ste-Anne-De-Bellevue, Quebec H9X 3V9, Canada %Jnion des Productuers Agricoles, Longueil, Quebec, Canada (Received 29 March 1996; revised version received 10 April 1996; accepted 29 June 1996)
ABSTRACT The economics of jrst generation two-breed crosses between Holstein and Ayrshire lines over three lactations were compared with those of the two purebreds. Results of the analysis of variance for breed performance traits indicated no signiJicant dlrerence between breeds for age at first calving. Holstein had the lowest milk fat percentage, and the purebred Ayrshire exceeded the two crossbreeds for milk fat percentage. The 4% fat corrected milk was the most important variable in explaining the variation in net present value in the profit function model. It was found that purebred Holstein was the most profitable breed, and purebred Ayrshire the least; the two crossbreeds were intermediate. 0 1997 Published by Elsevier Science Ltd. All rights reserved Abbreviations: AA = purebred Ayrshire, AH = AA line sire and HH line dam, HA = HH line sire and AA line dam, HH = purebred Holstein, NPV = Net Present Value.
INTRODUCTION Dairying in Canada accounted for more than 3-6 billion dollars in farm cash receipts in 1994 (Canadian Dairy Commission, 1994-95). During the last three decades the productivity of dairy cattle has increased substantially due to advances in genetics, nutrition, management and housing. Under the milk quota system in Canada, the increased production per cow means lower cost and higher net income per farm. Crossbreeding is used extensively in swine and poultry industries to take advantage of hybrid vigour, but is not practised 327
328
K. Gunjal, L. Menard, R. Shanmugam
widely in the dairy industry. However, fitness traits such as feed conversion efficiency, reproductive traits, and survival rate, which demonstrate the greatest heterosis have been overlooked in comparisons between purebreeds and crossbreeds (McDowell, 1982; Smith, 1978). Previous research work in the National Cooperative Dairy Cattle Breeding (NCDCB) Project on the comparison of purebred and crossbred dairy animals has concentrated on feed efficiency, reproductive performance and other genetic traits. The crossline heifers had, on average, larger body weights and dimensions, than the pureline heifers. Also the nonadditive genetic effects of crossing the purebred Holstein (HH) and purebred Ayrshire (AA) lines on size were relatively small compared to the additive genetic superiority of HH over AA (Batra et al., 1983). Crossbred females had a 21 week longer median herd life than the mean of the purelines at 308 days postpartum (Hocking et al., 1987). The HH heifers had greater feed efficiency than the AA heifers (Lee et al., 1988). The HH produced more milk and protein per day of productive life than did AH (McAllister et al., 1987). In order to understand the superiority of one breed over the other, a comprehensive economic analysis of different economic traits is essential. This study compares the relative profitability of purebred and crossbred dairy cows based on their performance during the first three lactations which determine the major part of economic returns from each cow in her herdlife. The main objective of the study is to compare the economic value of crossbred and purebred dairy animals.
METHODOLOGY
AND DATA SOURCES
The NCDCB Project was undertaken during the 1970s at five different research stations across Canada: Charlottetown in Prince Edward Island, Normandin and Lennoxville in Quebec, Ottawa in Ontario, and Lethbridge in Alberta. The purebred Holstein (HH) cows were bred with semen from Canadian and American Holstein bulls, to create the HH line. The purebred Ayrshire (AA) cows were bred with semen from Canadian, American and Finnish Ayrshire base line. The pureline foundation was established in 1972 and 1973 prior to the crossbreeding phase of the project. Beginning in 1974, one-third of the breeding females in the HH and AA line cows were mated to bulls from the other line. Progeny from these matings were designated as the first cross HA if they were from line HH males and line AA females and as first cross AH if they were from line AA males and line HH females. Two stations (Lennoxville and Lethbridge) maintained lines HH and AH, two other stations (Charlottetown and Normandin) had lines AA and HA, and
Economic analysis of crossbreeding dairy cattle
329
one station (Ottawa) had all four lines. Comprehensive information on each animal was recorded. Among the 1216 observations collected, a subsample of 200 observations, comprising 50 from each of the four breeds, were used for detailed analysis in this study. The sample size for each breed was restricted to 50 randomly selected animals because of the enormity of calculations involved in computing and discounting various revenues and optimal feed and other costs on a monthly basis from birth to third lactation for each animal. The discounted net present value of monthly net revenue stream from each cow was calculated using the following formula: NPV=
N Bf - c, c----(=,
(1 + 6)’
where NPV is the net present value in base period in dollars per cow, B, is the revenue in month t, C, is the cost in month t (t= 1, 2,...,N), N is the terminal period in number of months, and 6 is the selected discount rate. The lifetime revenue from three sources, namely, milk, calves and salvage value, was calculated for each cow. The price of fat corrected milk (milk with different fat percentages was converted into milk with 4% fat) for the three lactation periods was determined from the mean deflated net target base industrial milk price ($24.22/hl for 1977-1982). Monthly production of milk and fat were estimated in the calculation of milk revenues, and the milk revenues were discounted monthly. The price per calf was assumed to be fixed in the model and was the average of deflated yearly price of good veal on public stockyards (Montreal and Toronto common price for 1977-1982). The salvage value was calculated for animals culled before the end of the third lactation. If an animal died, its value was assumed to be $25 for a cow and $10 for a heifer. This value was confirmed by a firm (Lomex) specializing in the recuperation and processing of waste and dead animals. The salvage value ($37.74/100 lb) per line was calculated using body weight of culled animals and the mean of deflated yearly mean price of cows on public stockyard. The salvage value or remaining value (RV) in the present period was calculated by the formula: RV = C[(BW x 0.83/kg)
+ (PC) + (FCMx90/455kg)]CIC/(l
+ i)t
(2)
where, BW is body weight at cut-off date, PC is the pregnancy credit, FCM is the fat corrected milk, CIC is the cow index credit which equals the percentage by which the cow yield exceeds the herd average yield, i is the discount rate, and t is the month [for details, see Menard (1988)].
330
K. Gunjal, L. Menard, R. Shanmugam
The three types of costs (feed, labor and reproduction) were discounted monthly. Feed costs were calculated over the lifetime (growing, lactation and dry periods). A computer program called Mixit-2, developed by the Colorado State University, was used to store animal nutrient requirements and ingredients information to calculate least-cost feed mix. A single price for ingredients was determined from the mean deflated feed cost in the provinces of Quebec and Ontario (1977-1982). The price of ingredients was expressed in terms of cost per kilogram on a dry matter basis. For the labour cost, a deflated mean annual wage of $3.26 per hour between 1977 and 1982 was estimated based on the data of Statistics Canada. The reproduction cost was the artificial insemination cost which included the cost of the semen and the service of a professional artificial insemination technician. The reproduction cost, thus calculated, was $9 per cow, the price generally charged in Ontario and Quebec from 1977 to 1982 by the artificial insemination units. The risk-free real interest rate during the 1977-1982 period was the mean yield on Government of Canada bonds (11.69%) minus the mean inflation rate (9.92%) based on the consumer price index. To account for risk and uncertainty, Smith (1978) has suggested the use of an inflation-free interest rate of 2-6%. In this study, the required real discount rate was taken as 4%, which is equivalent to an inflation-free discount rate of 2%, with an additional 2% as a risk premium. The analysis of variance (ANOVA) was carried out using the Statistical Analysis System (SAS, 1985) package. A one-factor completely randomized design was used to test the significance of breed differences for the various traits: economic variables included net present value, milk revenue, calf revenue, remaining value, feed cost, labor cost and reproductive cost; biological variables included age at each calving, body weight at different calving, number of weeks in lactation, 4% fat corrected milk for each lactation and calving interval. The ANOVA model was specified by the linear equation: Xi = u + Ti + ei
(3)
where Xi is the dependent variable (such as NPV), u is the overall population mean, Ti is the effect of the breed i and ei is the random error component. This model is used to test the null hypothesis that HH = AA = HA = AH. A general milk production function can be expressed as follows: Y = AX,, .. .. Xm; Z1,
,.., Zn; Tl , . .. . T/c)
(4)
Economic analysis of crossbreeding dairy cattle
331
where Y, being the output per cow, is a function of Xi, Zi, and Tj, which are variable inputs (feed, labor etc.), fixed inputs (buildings, equipments etc.), and traits or characteristics (milk yield, calving interval etc.) of the animal, respectively. The economic value of a trait is “the amount by which net profit may be expected to increase for each unit of improvement in that trait” (Hazel, 1943). Profit can be defined as revenue (price times the quantity of output), less total costs which includes fixed and variable costs: l-l = P x fiXI, X2, . ..&.; Zt , Z2, ...Zn. T, , T2, . ..T/J
-
TC
where P is the price of output, A.) is output, and TC is total cost (sum of fixed and variable costs). Maximization of this function with respect to variable inputs, results in the optimal quantities of input Xi*. The quantities of Xi* are functions of the normalized prices of variable inputs and of the quantities of fixed inputs and the traits. By the substitution of Xi* the maximized profit is obtained as: lTl* =flC,,
. ..Cm. Z1, . ... Z,,; T1, . . . . Tk)
where, n* represents the maximum profit possible which depends on input prices, C, fixed inputs, Z, and traits, T. This is similar to the model suggested by Ladd (1982). If one uses the experimental data for a herd having a similar time period, location, physical facilities, management and unit output and input prices, the profit function from eqn (6) can be simplified as: IFI*=f(d, Tl, . ..Tk)
(7)
where d is constant. In this study, the NPV is considered as profit. The NPV model to be estimated can be expressed as follows:
where i represents the th cow (i= 1,2,..., n), /IO,Br, 82,..., 8s are the regression coefhcients, Tli, Tzi,..., Tsi the explanatory variables, and Ui the error term.
332
K. Gunjal, L. Menard, R. Shanmugam
TABLE 1
Mean and Coefficients of Variation of Present Value of Selected Variables Variables
Milk revenues ($) Calf revenues ($) Remaining value ($) Feed cost (S) Labor cost ($) Reproductive cost ($) Net present value ($)
HH
AA
HA
AH
2436.32 (41.57) 128.97 (30.74) 869.56 (68.37) 1445.34 (27.32) 611.40 (26.84) 42.22 (47.37) 1335.89 (75.72)
1722.63 (41.14) 109.94 (30.50) 610.02 (67.55) 1112.71
2025.44 (39.23) 126.67 (22.86) 736.73 (72.99) 1238.32 (23.79) 562.38 (27.04) 37.22 (43.74) 1050.91 (83.16)
2140.39 (46.01) 134.40 (27.70) 895.09 (62.01) 1319.30 (26.45) 557.20
(26.27) 523.25
(29.35) 45.54 (50.46) 761.10 (89.96)
(29.34) 41.39 (44.29) 1252.01 (84.98)
Number of observations are 50 for each of the four breeds. Coefficient of variation in parentheses.
RESULTS
AND DISCUSSION
Revenue, costs and the net present values The HH had the highest NPV (Table l), followed by the two crossbreeds AH and HA, and the AA had the lowest. The HH lifetime discounted milk revenue averaged 14% more than AH, 20% more than HA, and 41% more than AA. The AH accounted for the highest calf revenue, the average being 4% higher than HH, 6% higher than HA and 22% higher than AA. The remaining value was highest for AH, 3% more than HH, 21% more than HA, and 46% higher than AA. Comparisons of lifetime total revenue indicates that the HH generated the highest gross revenue: 8% more than AH, 19% more than HA, and 41% more than AA. However, the feed cost from birth to the end of the third lactation for the upkeep of HH cost 10% more than AH, 17% more than HA, and 30% more than AA. Labor cost was highest for HH and reproductive cost was highest for AA. The results of the NPV and the discounted economic variables indicate that HH was the most profitable breed, and AA was the least profitable. The two crossbreeds were intermediate. The coefficient of variation for NPV showed that the amount of variation in the HH breed was the lowest (76%), and AA the highest (90%), crossbreeds were intermediate (HA 83%; AH 85%).
and ‘P
5.56’ 4.52’ 3.09b 8.68’ 2.63’ 1.53 3.86b
Milk revenue Calf revenue Remaining value Feed cost Labor cost Reproductive cost Net present value
“P
Among 4 breed
(ANOVA)
5.07b 0.11 1.37 8.83’ 2.40 1.88 2.27
Between HA and HH
of Variance
Source of variation
F values from the Analysis
2.18 0.50 0.05 2.86” 2.74 0.05 0.16
Between AH and HH
Randomized
4.06b 7.12’ 1.75 4.58b 1.64 4.356 3.41
Between HA and AA
TABLE 2 Using One Factor Completely for Economic
5.936 11.92’ 8.50’ 10.30 1.15 1.00 7.53’
Between AH and AA
Design
1.07
1.44
0.41 1.34 2.10 1.57 0.03
Between HA and AH
Variables
$ k B 2 z-
s ? 0 2 T 2 B 8
67 a K’ 9 f?. 2ro’
h 8
334
K. Gunjal, L. Menard, R. Shanmugam
Milk revenue for HH was significantly different from HA (Table 2). Milk revenues among the two crossbred were not significant, but AA was significantly different from crossbred groups. The two crossbred did not show significant difference for calf revenues but the difference was significant between AH and AA. No significant difference was encountered between HH and the two crossbreeds or among crossbreeds. Feed cost, the major expense over the lifetime, was significantly different between HA and HH and among HH and AH. Also, the difference between the HA and AA was significant. Labor costs were significantly different among the four breeds. For the reproduction costs, there was a significant difference between HA and AA. Breed traits The F values using a one-factor, completely randomized design for breed performance traits (Table 3) indicate that there were no significant differences between breeds for age at first calving, age at second calving, first calving interval and second calving interval. This result is in agreement with earlier studies (McDowell & McDaniel, 1968b; Parekh & Touchberry, 198 1; Rincon et al., 1982) which found that breed groups had no marked effect on age at first calving. Results indicate a significant difference among the four breeds for the fat corrected milk. Holstein was the most productive breed, AA the least, and the two crossbred were intermediate. During the first lactation, HH produced on average 217 kg more milk than AH and 398 kg more than HA. However, the difference between HH and AH was not significant as found in an earlier study (McDowell & McDaniel, 19683). The difference was highly significant between the crossbreeds and AA during the first lactation, but this difference disappears for the second and third lactation. The HH produced 16% and 23% more than AH during the second and third lactation, respectively. The HH produced 20 and 25% more than HA during the second and third lactations respectively. The percentage variation of milk production between the crossbreeds and Holstein increased with the number of lactations; the same trend was not seen for AA. The HH had the lowest fat percentage, AA had the highest, and the crossbreeds were intermediate. No significant difference occurred between HH and the two crossbred, which was in accordance with results from an earlier study (McDowell & McDaniel, 1968~). The profit function Table 4 shows the variables that explain the variation in NPV (i.e. the discounted profits). The R2 indicated that 80.24% of the variation in NPV was
6.89’ 0.52 2.19” 26.84’ 2.02
4.74’ 0.31 2.83’
19.36’ 3.60b 2.84b
5.65’
FCM in lactation 1 I st calving interval Age at 2nd calving Weight at 2nd calving Weeks in lactation 2
FCM lactation 2 2nd calving interval Age at 3rd calving
Weight in3rdlactation calving 3 Weeks Butter fat % lactation 3
FCM lactation 3
“P
27.52’ 3.68’ 5.44’
1.53
Age at 1st calving
Weight at first calving Weeks in lactation 1 Butter fat %lactation 1
Among four breeds
Source of variation
F values from the Analysis of Variance (ANOVA)
TABLE 3
7.99’
8.31’ 3.64” 1.02
7.59’ 0.08 2.19
3.36” 0.90 1.36 22.91’ 2.91”
21.89’ 4.42’ 12.89’
0.21
Between HA and HH
6.23’
0.14 6.56b 0.88
4.336 0.54 0.01
0.85 0.01 0.06 2.33 4.146
3.37” 3.51” 9.05’
0.33”
Between AH and HH
Using One Factor Completely Traits
1.59
3.97”
14.47c 1.39
0.57 0.21 11.09’
8.61’ 1.51 6.92b 13.01’ 0.28
14.81’ 1.16 0.03
2.46
2.24
45.18’ 0.69 4.18’
1.82 0.88 2.00
12.63’ 0.03 1.27 48.10” 0.06
48.58’ 2.22 0.29
1.98
Between AH and AA
0.07
8.75’ 0.20 0.01
0.35 0.23 2.78“
0.83 0.88 1.94 11.97’ 0.08
8.60’ 0.11 0.55
0.02
Between HA and AH
Design for the Selected Breed Performance
Between HA and AA
Randomized
EY 2 a f
5 a 2 Y 2 SY B
i z1
0 S
B.
b 2
336
K. Gunjal, L. Menard, R. Shanmugam
TABLE 4
Estimates of Time, Body, and Breed Related Variables in the Profit (Net Present Value) Function Variable
Intercept Time related variables: Age at first calving (months) Calving interval (days) Weeks in lactation Body characteristics: Weight at birth (kg) Weight at 1st calving (kg) Breed related variables: 4% fat corrected milk (kg) Butter fat % lactation 3 Number of AI. services No. of observations R2 F statistics
HH
AA
AH
HA
2107.50
4419.50
-1495.90
-240.04
-0.111 (0.01) -2.617 (0.87) -10.135 (0.42)
-45.940 (0.92) -7.167 (2.31)) -44.479 (1.66)
-28.833 (0.50) 6.385 (1.38) -31.710 (1.99)
-16.410 (0.15) -2.698 (0.75) -26.674 (1.04)
8.328 (0.36) -6.193 (2.22)
-4.478 (0.24) -1.883 (0.72)
-24.305 (1.57) 2.112 (0.76)
35.018 (1.86) -2.096 (0.73)
0.737 (6.32)b 62.299 (0.38) -8.639 (0.22) 31 0.8024 11.165b
0.925 (5.22)b -35.108 (0.25) -1.037 (0.03) 28 0.7836 8.6016
0.826 (9.46)b -79.322 (0.51) -94.898 (1.28) 34 0.9035 29.266’
0.885 (5.17)b 46.092 (0.28) 20.360 (0.25) 32 0.8445 15.617’
t statistics are in parentheses. “P
explained by the selected independent variables. Only the statistically significant variables are explained below. Time-related variables affect the stream of cash outflow and cash inflow, which occur at different time periods and consequently affect the NPV. Only for AA was the calving interval significant. The decrease in the calving interval by 1 month in AA will contribute $7.17 to the NPV. The effect of the number of weeks in lactation was negative and significant for AH. The decrease in the weeks in lactation by 1 week will increase the NPV by $3 1a71 in the AH. Thus, a higher profit could be generated from AH when the number of weeks in lactation was reduced, keeping all other factors including milk production constant. In the case of body characteristic variables, the body weight at birth for the HA was positive and significant. An increase in body weight at birth for HA by 1 kg will add $3502 to the NPV. The significant and negative sign of the
Economic analysis of crossbreeding dairy cattle
337
body weight at first calving for the HH is due to the fact that the HH cows are heavier at calving and consequently produce more milk, but incur higher feed and labor costs as compared to other breeds (Gill & Allaire, 1976). Among the breed characteristics, the fat corrected milk was the most significant variable in all four breeds. An increase in the fat corrected milk by 100 kg per month will result in the highest increase in NPV ($93) for AA and the lowest increase ($74) for HH. The HA and AH fall in between the above two. This indicates that to maximize economic returns from dairy herds the main emphasis should be on increasing milk production.
SUMMARY
AND CONCLUSIONS
Similar to the results of Touchberry & Bereskin (1966) this study found that purebred Holstein had the largest net present value. In addition, the HH also exhibited the least variation in this income. In general, the fat corrected milk was significantly higher for HH than for the two crossbreeds. The number of weeks in lactation was significantly different between HH and the two crossbreeds. The discounted milk revenues of Holstein were not significantly higher than that of AH over their lifetime. On the other hand, AH had a higher fat percentage than HH. Given that some countries are switching to pricing milk components, crossbreeding may play an important role in achieving the desirable proportions of these milk components. The profit function model indicates that milk production was the most significant variable contributing to higher profits in all four breeds. The crossbred animals did not show significant differences in biological traits such as age at first calving, days open and reproductive performance. The lifetime net revenue for crossbreeds was lower than that of HH, but the difference was not statistically significant. Discounted income and expenses indicate that both crossbreeds were more profitable than the purebred Ayrshire. With some exceptions other traits, such as weeks in lactation and body weight at first calving, were significant. It can be concluded from this study that the crossbred cows are not superior in milk production to the HH, but they are superior to AA. Station effects were not considered in this study as feeding regime and management practices were fairly homogenous. In developing countries, where the high production exotic breeds are crossed with low production local breeds, the crossbreeds exceed the performance of local breeds. This offers high potential for the export of breeding stock, frozen embryos, and semen straws to countries that are developing their dairy sector by combining the heat and disease-resistant characteristics of local breeds with high production traits of exotic dairy breeds.
338
K. Gunjal, L. Menard, R. Shanmugam
ACKNOWLEDGEMENTS This paper is based on the M.Sc. thesis of the second author. The authors thank Elliot Block for his assistance in least-cost feed formulation and Vijay Chauhan for his helpful comments on the initial draft. The funding provided by Agriculture Canada for this study is greatly acknowledged. The useful comments and suggestions by the reviewers are sincerely appreciated. The authors are solely responsible for any errors or omission.
REFERENCES Batra, T. R., McAllister, A. J., Lee, A. J., Lin, C. Y., Roy, G. L., Vesely, J. A., Wauthy, J. & Winter, K. A. (1983). Body weights and dimensions of pureline and crossline heifers of the Canadian Dairy Cattle Breeding Project. Canadian Journal of Animal Science 63, 51 l-522. Canadian Dairy Commission. (1994-95). Annual Report. Canadian Dairy Commission, Ottawa, Ontario. Gill, G. S. & Allaire, F. R. (1976). Relationship of age at first calving, days open, days dry and herd life to a profit function for dairy cattle. J. Dairy Sci. 59, 1131-1139. Hazel, L. N. (1943). The genetic basis for constructing selection indexes. Genetics 28, 476490. Hocking, P. M., McAllister, A. J., Wolynetz, M. S., Batra, T. R., Lee, A. J., Lin, C. Y., Roy, G. L., Vesely, J. A., Wauthy, J. M. & Winter, K. A. (1987). Factors affecting length of herdlife in purebred and crossbred dairy cattle. J. Dairy Sci. 71, 101 l-1024. Ladd, G. W. (1982). A product-characteristics approach to technical change: With application to animal breeding. In Economic Analysis and Agricultural Policy, ed. R. H. Day. Ames, The Iowa State University Press, Iowa. Lee, A. J., Lin, C. Y., McAllister, A. J., Winter, K. A., Roy, G. L., Vesely, J. A., Wauthy, J. M., Batra, T. R. & Atwal, A. S. (1988). Growth and feed efficiency of pureline and crossline dairy heifers. J. Dairy Sci. 71, 1000-1010. McAllister, A. J., Chesnais, J. P., Batra, T. R., Lee, A. J., Lin, C. Y., Roy, G. L., Vesely, J. A., Wauthy, J. M. & Winter, K. A. (1987). Herdlife lactation yield, herdlife and survival of Holstein and Ayrshire-based lines of dairy cattle. J. Dairy Sci. 70, 1442-1451.
McDowell, R. E. (1982). Crossbreeding as a system of mating for dairy production. Southern Cooperative Series Bulletin (July), p. 259. McDowell, R. E. & McDaniel, B. T. (1968a). Interbreed matings in dairy cattle. Economic aspects. Animal Husbandry Research Division. USDA. Beltsville, Maryland. J. Dairy Sci. 52, 1649-1658. McDowell, R. E. & McDaniel, B. T. (19683). Interbreed matings in dairy cattle. Yield, trait, feed efficiency, type and rate of milking. J. Dairy Sci. 51, 767-777. Menard, L. (1988). Economic analysis of first generation two breed crosses between holstein and ayrshire. Unpublished M.Sc. thesis. Department of Agricultural Economics, Macdonald campus, McGill University, Canada.
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Parekh, H. K. B. & Touchberry, R. W. (1981). Comparative reproduction performance of cross- breds and contemporary pure-bred dairy cattle: Heifers and their first calving dry period record. Indian J. Animal Sci. 51, 756-760. Rincon, E. J., Schermerthorn, E. C., McDowell, R. E. & McDaniel, B. T. (1982). Estimation of genetic effects on milk yield and constituent traits in crossbred dairy cattle. J. Dairy Sci. 65, 848-856. Smith, C. (1978). The effect of inflation and farm investment on the estimated value of genetic improvement in farm livestock. Animal Production 26, 10 1. Statistics Canada. Farm wages in Canada. Cat 21-002. Quarterly. Various issues. Ottawa. Touchberry, R. W. & Bereskin, B. (1966). Crossbreeding dairy cattle weights and body measurements of purebred holstein and guernsey females and their reciprocal crossbred. J. Dairy Sci. 49, 647.
PII:
SO308-521X(96)00068-6
Systems, Vol. 54, No. 3 pp. 327-339, 1997 0 1997 Published by Elsevier Science Ltd All rights reserved. Printed in Great Britain 0308-521X/97 $17.00+0.00
ELSEVIER
Economic Analysis of Crossbreeding Dairy Cattle Kisan Gunjal,” Louis Menardb
& Ramaradj
Shanmugam”
ODepartment of Agricultural Economics, Macdonald campus of McGill University, Ste-Anne-De-Bellevue, Quebec H9X 3V9, Canada %Jnion des Productuers Agricoles, Longueil, Quebec, Canada (Received 29 March 1996; revised version received 10 April 1996; accepted 29 June 1996)
ABSTRACT The economics of jrst generation two-breed crosses between Holstein and Ayrshire lines over three lactations were compared with those of the two purebreds. Results of the analysis of variance for breed performance traits indicated no signiJicant dlrerence between breeds for age at first calving. Holstein had the lowest milk fat percentage, and the purebred Ayrshire exceeded the two crossbreeds for milk fat percentage. The 4% fat corrected milk was the most important variable in explaining the variation in net present value in the profit function model. It was found that purebred Holstein was the most profitable breed, and purebred Ayrshire the least; the two crossbreeds were intermediate. 0 1997 Published by Elsevier Science Ltd. All rights reserved Abbreviations: AA = purebred Ayrshire, AH = AA line sire and HH line dam, HA = HH line sire and AA line dam, HH = purebred Holstein, NPV = Net Present Value.
INTRODUCTION Dairying in Canada accounted for more than 3-6 billion dollars in farm cash receipts in 1994 (Canadian Dairy Commission, 1994-95). During the last three decades the productivity of dairy cattle has increased substantially due to advances in genetics, nutrition, management and housing. Under the milk quota system in Canada, the increased production per cow means lower cost and higher net income per farm. Crossbreeding is used extensively in swine and poultry industries to take advantage of hybrid vigour, but is not practised 327
328
K. Gunjal, L. Menard, R. Shanmugam
widely in the dairy industry. However, fitness traits such as feed conversion efficiency, reproductive traits, and survival rate, which demonstrate the greatest heterosis have been overlooked in comparisons between purebreeds and crossbreeds (McDowell, 1982; Smith, 1978). Previous research work in the National Cooperative Dairy Cattle Breeding (NCDCB) Project on the comparison of purebred and crossbred dairy animals has concentrated on feed efficiency, reproductive performance and other genetic traits. The crossline heifers had, on average, larger body weights and dimensions, than the pureline heifers. Also the nonadditive genetic effects of crossing the purebred Holstein (HH) and purebred Ayrshire (AA) lines on size were relatively small compared to the additive genetic superiority of HH over AA (Batra et al., 1983). Crossbred females had a 21 week longer median herd life than the mean of the purelines at 308 days postpartum (Hocking et al., 1987). The HH heifers had greater feed efficiency than the AA heifers (Lee et al., 1988). The HH produced more milk and protein per day of productive life than did AH (McAllister et al., 1987). In order to understand the superiority of one breed over the other, a comprehensive economic analysis of different economic traits is essential. This study compares the relative profitability of purebred and crossbred dairy cows based on their performance during the first three lactations which determine the major part of economic returns from each cow in her herdlife. The main objective of the study is to compare the economic value of crossbred and purebred dairy animals.
METHODOLOGY
AND DATA SOURCES
The NCDCB Project was undertaken during the 1970s at five different research stations across Canada: Charlottetown in Prince Edward Island, Normandin and Lennoxville in Quebec, Ottawa in Ontario, and Lethbridge in Alberta. The purebred Holstein (HH) cows were bred with semen from Canadian and American Holstein bulls, to create the HH line. The purebred Ayrshire (AA) cows were bred with semen from Canadian, American and Finnish Ayrshire base line. The pureline foundation was established in 1972 and 1973 prior to the crossbreeding phase of the project. Beginning in 1974, one-third of the breeding females in the HH and AA line cows were mated to bulls from the other line. Progeny from these matings were designated as the first cross HA if they were from line HH males and line AA females and as first cross AH if they were from line AA males and line HH females. Two stations (Lennoxville and Lethbridge) maintained lines HH and AH, two other stations (Charlottetown and Normandin) had lines AA and HA, and
Economic analysis of crossbreeding dairy cattle
329
one station (Ottawa) had all four lines. Comprehensive information on each animal was recorded. Among the 1216 observations collected, a subsample of 200 observations, comprising 50 from each of the four breeds, were used for detailed analysis in this study. The sample size for each breed was restricted to 50 randomly selected animals because of the enormity of calculations involved in computing and discounting various revenues and optimal feed and other costs on a monthly basis from birth to third lactation for each animal. The discounted net present value of monthly net revenue stream from each cow was calculated using the following formula: NPV=
N Bf - c, c----(=,
(1 + 6)’
where NPV is the net present value in base period in dollars per cow, B, is the revenue in month t, C, is the cost in month t (t= 1, 2,...,N), N is the terminal period in number of months, and 6 is the selected discount rate. The lifetime revenue from three sources, namely, milk, calves and salvage value, was calculated for each cow. The price of fat corrected milk (milk with different fat percentages was converted into milk with 4% fat) for the three lactation periods was determined from the mean deflated net target base industrial milk price ($24.22/hl for 1977-1982). Monthly production of milk and fat were estimated in the calculation of milk revenues, and the milk revenues were discounted monthly. The price per calf was assumed to be fixed in the model and was the average of deflated yearly price of good veal on public stockyards (Montreal and Toronto common price for 1977-1982). The salvage value was calculated for animals culled before the end of the third lactation. If an animal died, its value was assumed to be $25 for a cow and $10 for a heifer. This value was confirmed by a firm (Lomex) specializing in the recuperation and processing of waste and dead animals. The salvage value ($37.74/100 lb) per line was calculated using body weight of culled animals and the mean of deflated yearly mean price of cows on public stockyard. The salvage value or remaining value (RV) in the present period was calculated by the formula: RV = C[(BW x 0.83/kg)
+ (PC) + (FCMx90/455kg)]CIC/(l
+ i)t
(2)
where, BW is body weight at cut-off date, PC is the pregnancy credit, FCM is the fat corrected milk, CIC is the cow index credit which equals the percentage by which the cow yield exceeds the herd average yield, i is the discount rate, and t is the month [for details, see Menard (1988)].
330
K. Gunjal, L. Menard, R. Shanmugam
The three types of costs (feed, labor and reproduction) were discounted monthly. Feed costs were calculated over the lifetime (growing, lactation and dry periods). A computer program called Mixit-2, developed by the Colorado State University, was used to store animal nutrient requirements and ingredients information to calculate least-cost feed mix. A single price for ingredients was determined from the mean deflated feed cost in the provinces of Quebec and Ontario (1977-1982). The price of ingredients was expressed in terms of cost per kilogram on a dry matter basis. For the labour cost, a deflated mean annual wage of $3.26 per hour between 1977 and 1982 was estimated based on the data of Statistics Canada. The reproduction cost was the artificial insemination cost which included the cost of the semen and the service of a professional artificial insemination technician. The reproduction cost, thus calculated, was $9 per cow, the price generally charged in Ontario and Quebec from 1977 to 1982 by the artificial insemination units. The risk-free real interest rate during the 1977-1982 period was the mean yield on Government of Canada bonds (11.69%) minus the mean inflation rate (9.92%) based on the consumer price index. To account for risk and uncertainty, Smith (1978) has suggested the use of an inflation-free interest rate of 2-6%. In this study, the required real discount rate was taken as 4%, which is equivalent to an inflation-free discount rate of 2%, with an additional 2% as a risk premium. The analysis of variance (ANOVA) was carried out using the Statistical Analysis System (SAS, 1985) package. A one-factor completely randomized design was used to test the significance of breed differences for the various traits: economic variables included net present value, milk revenue, calf revenue, remaining value, feed cost, labor cost and reproductive cost; biological variables included age at each calving, body weight at different calving, number of weeks in lactation, 4% fat corrected milk for each lactation and calving interval. The ANOVA model was specified by the linear equation: Xi = u + Ti + ei
(3)
where Xi is the dependent variable (such as NPV), u is the overall population mean, Ti is the effect of the breed i and ei is the random error component. This model is used to test the null hypothesis that HH = AA = HA = AH. A general milk production function can be expressed as follows: Y = AX,, .. .. Xm; Z1,
,.., Zn; Tl , . .. . T/c)
(4)
Economic analysis of crossbreeding dairy cattle
331
where Y, being the output per cow, is a function of Xi, Zi, and Tj, which are variable inputs (feed, labor etc.), fixed inputs (buildings, equipments etc.), and traits or characteristics (milk yield, calving interval etc.) of the animal, respectively. The economic value of a trait is “the amount by which net profit may be expected to increase for each unit of improvement in that trait” (Hazel, 1943). Profit can be defined as revenue (price times the quantity of output), less total costs which includes fixed and variable costs: l-l = P x fiXI, X2, . ..&.; Zt , Z2, ...Zn. T, , T2, . ..T/J
-
TC
where P is the price of output, A.) is output, and TC is total cost (sum of fixed and variable costs). Maximization of this function with respect to variable inputs, results in the optimal quantities of input Xi*. The quantities of Xi* are functions of the normalized prices of variable inputs and of the quantities of fixed inputs and the traits. By the substitution of Xi* the maximized profit is obtained as: lTl* =flC,,
. ..Cm. Z1, . ... Z,,; T1, . . . . Tk)
where, n* represents the maximum profit possible which depends on input prices, C, fixed inputs, Z, and traits, T. This is similar to the model suggested by Ladd (1982). If one uses the experimental data for a herd having a similar time period, location, physical facilities, management and unit output and input prices, the profit function from eqn (6) can be simplified as: IFI*=f(d, Tl, . ..Tk)
(7)
where d is constant. In this study, the NPV is considered as profit. The NPV model to be estimated can be expressed as follows:
where i represents the th cow (i= 1,2,..., n), /IO,Br, 82,..., 8s are the regression coefhcients, Tli, Tzi,..., Tsi the explanatory variables, and Ui the error term.
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K. Gunjal, L. Menard, R. Shanmugam
TABLE 1
Mean and Coefficients of Variation of Present Value of Selected Variables Variables
Milk revenues ($) Calf revenues ($) Remaining value ($) Feed cost (S) Labor cost ($) Reproductive cost ($) Net present value ($)
HH
AA
HA
AH
2436.32 (41.57) 128.97 (30.74) 869.56 (68.37) 1445.34 (27.32) 611.40 (26.84) 42.22 (47.37) 1335.89 (75.72)
1722.63 (41.14) 109.94 (30.50) 610.02 (67.55) 1112.71
2025.44 (39.23) 126.67 (22.86) 736.73 (72.99) 1238.32 (23.79) 562.38 (27.04) 37.22 (43.74) 1050.91 (83.16)
2140.39 (46.01) 134.40 (27.70) 895.09 (62.01) 1319.30 (26.45) 557.20
(26.27) 523.25
(29.35) 45.54 (50.46) 761.10 (89.96)
(29.34) 41.39 (44.29) 1252.01 (84.98)
Number of observations are 50 for each of the four breeds. Coefficient of variation in parentheses.
RESULTS
AND DISCUSSION
Revenue, costs and the net present values The HH had the highest NPV (Table l), followed by the two crossbreeds AH and HA, and the AA had the lowest. The HH lifetime discounted milk revenue averaged 14% more than AH, 20% more than HA, and 41% more than AA. The AH accounted for the highest calf revenue, the average being 4% higher than HH, 6% higher than HA and 22% higher than AA. The remaining value was highest for AH, 3% more than HH, 21% more than HA, and 46% higher than AA. Comparisons of lifetime total revenue indicates that the HH generated the highest gross revenue: 8% more than AH, 19% more than HA, and 41% more than AA. However, the feed cost from birth to the end of the third lactation for the upkeep of HH cost 10% more than AH, 17% more than HA, and 30% more than AA. Labor cost was highest for HH and reproductive cost was highest for AA. The results of the NPV and the discounted economic variables indicate that HH was the most profitable breed, and AA was the least profitable. The two crossbreeds were intermediate. The coefficient of variation for NPV showed that the amount of variation in the HH breed was the lowest (76%), and AA the highest (90%), crossbreeds were intermediate (HA 83%; AH 85%).
and ‘P
5.56’ 4.52’ 3.09b 8.68’ 2.63’ 1.53 3.86b
Milk revenue Calf revenue Remaining value Feed cost Labor cost Reproductive cost Net present value
“P
Among 4 breed
(ANOVA)
5.07b 0.11 1.37 8.83’ 2.40 1.88 2.27
Between HA and HH
of Variance
Source of variation
F values from the Analysis
2.18 0.50 0.05 2.86” 2.74 0.05 0.16
Between AH and HH
Randomized
4.06b 7.12’ 1.75 4.58b 1.64 4.356 3.41
Between HA and AA
TABLE 2 Using One Factor Completely for Economic
5.936 11.92’ 8.50’ 10.30 1.15 1.00 7.53’
Between AH and AA
Design
1.07
1.44
0.41 1.34 2.10 1.57 0.03
Between HA and AH
Variables
$ k B 2 z-
s ? 0 2 T 2 B 8
67 a K’ 9 f?. 2ro’
h 8
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K. Gunjal, L. Menard, R. Shanmugam
Milk revenue for HH was significantly different from HA (Table 2). Milk revenues among the two crossbred were not significant, but AA was significantly different from crossbred groups. The two crossbred did not show significant difference for calf revenues but the difference was significant between AH and AA. No significant difference was encountered between HH and the two crossbreeds or among crossbreeds. Feed cost, the major expense over the lifetime, was significantly different between HA and HH and among HH and AH. Also, the difference between the HA and AA was significant. Labor costs were significantly different among the four breeds. For the reproduction costs, there was a significant difference between HA and AA. Breed traits The F values using a one-factor, completely randomized design for breed performance traits (Table 3) indicate that there were no significant differences between breeds for age at first calving, age at second calving, first calving interval and second calving interval. This result is in agreement with earlier studies (McDowell & McDaniel, 1968b; Parekh & Touchberry, 198 1; Rincon et al., 1982) which found that breed groups had no marked effect on age at first calving. Results indicate a significant difference among the four breeds for the fat corrected milk. Holstein was the most productive breed, AA the least, and the two crossbred were intermediate. During the first lactation, HH produced on average 217 kg more milk than AH and 398 kg more than HA. However, the difference between HH and AH was not significant as found in an earlier study (McDowell & McDaniel, 19683). The difference was highly significant between the crossbreeds and AA during the first lactation, but this difference disappears for the second and third lactation. The HH produced 16% and 23% more than AH during the second and third lactation, respectively. The HH produced 20 and 25% more than HA during the second and third lactations respectively. The percentage variation of milk production between the crossbreeds and Holstein increased with the number of lactations; the same trend was not seen for AA. The HH had the lowest fat percentage, AA had the highest, and the crossbreeds were intermediate. No significant difference occurred between HH and the two crossbred, which was in accordance with results from an earlier study (McDowell & McDaniel, 1968~). The profit function Table 4 shows the variables that explain the variation in NPV (i.e. the discounted profits). The R2 indicated that 80.24% of the variation in NPV was
6.89’ 0.52 2.19” 26.84’ 2.02
4.74’ 0.31 2.83’
19.36’ 3.60b 2.84b
5.65’
FCM in lactation 1 I st calving interval Age at 2nd calving Weight at 2nd calving Weeks in lactation 2
FCM lactation 2 2nd calving interval Age at 3rd calving
Weight in3rdlactation calving 3 Weeks Butter fat % lactation 3
FCM lactation 3
“P
27.52’ 3.68’ 5.44’
1.53
Age at 1st calving
Weight at first calving Weeks in lactation 1 Butter fat %lactation 1
Among four breeds
Source of variation
F values from the Analysis of Variance (ANOVA)
TABLE 3
7.99’
8.31’ 3.64” 1.02
7.59’ 0.08 2.19
3.36” 0.90 1.36 22.91’ 2.91”
21.89’ 4.42’ 12.89’
0.21
Between HA and HH
6.23’
0.14 6.56b 0.88
4.336 0.54 0.01
0.85 0.01 0.06 2.33 4.146
3.37” 3.51” 9.05’
0.33”
Between AH and HH
Using One Factor Completely Traits
1.59
3.97”
14.47c 1.39
0.57 0.21 11.09’
8.61’ 1.51 6.92b 13.01’ 0.28
14.81’ 1.16 0.03
2.46
2.24
45.18’ 0.69 4.18’
1.82 0.88 2.00
12.63’ 0.03 1.27 48.10” 0.06
48.58’ 2.22 0.29
1.98
Between AH and AA
0.07
8.75’ 0.20 0.01
0.35 0.23 2.78“
0.83 0.88 1.94 11.97’ 0.08
8.60’ 0.11 0.55
0.02
Between HA and AH
Design for the Selected Breed Performance
Between HA and AA
Randomized
EY 2 a f
5 a 2 Y 2 SY B
i z1
0 S
B.
b 2
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K. Gunjal, L. Menard, R. Shanmugam
TABLE 4
Estimates of Time, Body, and Breed Related Variables in the Profit (Net Present Value) Function Variable
Intercept Time related variables: Age at first calving (months) Calving interval (days) Weeks in lactation Body characteristics: Weight at birth (kg) Weight at 1st calving (kg) Breed related variables: 4% fat corrected milk (kg) Butter fat % lactation 3 Number of AI. services No. of observations R2 F statistics
HH
AA
AH
HA
2107.50
4419.50
-1495.90
-240.04
-0.111 (0.01) -2.617 (0.87) -10.135 (0.42)
-45.940 (0.92) -7.167 (2.31)) -44.479 (1.66)
-28.833 (0.50) 6.385 (1.38) -31.710 (1.99)
-16.410 (0.15) -2.698 (0.75) -26.674 (1.04)
8.328 (0.36) -6.193 (2.22)
-4.478 (0.24) -1.883 (0.72)
-24.305 (1.57) 2.112 (0.76)
35.018 (1.86) -2.096 (0.73)
0.737 (6.32)b 62.299 (0.38) -8.639 (0.22) 31 0.8024 11.165b
0.925 (5.22)b -35.108 (0.25) -1.037 (0.03) 28 0.7836 8.6016
0.826 (9.46)b -79.322 (0.51) -94.898 (1.28) 34 0.9035 29.266’
0.885 (5.17)b 46.092 (0.28) 20.360 (0.25) 32 0.8445 15.617’
t statistics are in parentheses. “P
explained by the selected independent variables. Only the statistically significant variables are explained below. Time-related variables affect the stream of cash outflow and cash inflow, which occur at different time periods and consequently affect the NPV. Only for AA was the calving interval significant. The decrease in the calving interval by 1 month in AA will contribute $7.17 to the NPV. The effect of the number of weeks in lactation was negative and significant for AH. The decrease in the weeks in lactation by 1 week will increase the NPV by $3 1a71 in the AH. Thus, a higher profit could be generated from AH when the number of weeks in lactation was reduced, keeping all other factors including milk production constant. In the case of body characteristic variables, the body weight at birth for the HA was positive and significant. An increase in body weight at birth for HA by 1 kg will add $3502 to the NPV. The significant and negative sign of the
Economic analysis of crossbreeding dairy cattle
337
body weight at first calving for the HH is due to the fact that the HH cows are heavier at calving and consequently produce more milk, but incur higher feed and labor costs as compared to other breeds (Gill & Allaire, 1976). Among the breed characteristics, the fat corrected milk was the most significant variable in all four breeds. An increase in the fat corrected milk by 100 kg per month will result in the highest increase in NPV ($93) for AA and the lowest increase ($74) for HH. The HA and AH fall in between the above two. This indicates that to maximize economic returns from dairy herds the main emphasis should be on increasing milk production.
SUMMARY
AND CONCLUSIONS
Similar to the results of Touchberry & Bereskin (1966) this study found that purebred Holstein had the largest net present value. In addition, the HH also exhibited the least variation in this income. In general, the fat corrected milk was significantly higher for HH than for the two crossbreeds. The number of weeks in lactation was significantly different between HH and the two crossbreeds. The discounted milk revenues of Holstein were not significantly higher than that of AH over their lifetime. On the other hand, AH had a higher fat percentage than HH. Given that some countries are switching to pricing milk components, crossbreeding may play an important role in achieving the desirable proportions of these milk components. The profit function model indicates that milk production was the most significant variable contributing to higher profits in all four breeds. The crossbred animals did not show significant differences in biological traits such as age at first calving, days open and reproductive performance. The lifetime net revenue for crossbreeds was lower than that of HH, but the difference was not statistically significant. Discounted income and expenses indicate that both crossbreeds were more profitable than the purebred Ayrshire. With some exceptions other traits, such as weeks in lactation and body weight at first calving, were significant. It can be concluded from this study that the crossbred cows are not superior in milk production to the HH, but they are superior to AA. Station effects were not considered in this study as feeding regime and management practices were fairly homogenous. In developing countries, where the high production exotic breeds are crossed with low production local breeds, the crossbreeds exceed the performance of local breeds. This offers high potential for the export of breeding stock, frozen embryos, and semen straws to countries that are developing their dairy sector by combining the heat and disease-resistant characteristics of local breeds with high production traits of exotic dairy breeds.
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K. Gunjal, L. Menard, R. Shanmugam
ACKNOWLEDGEMENTS This paper is based on the M.Sc. thesis of the second author. The authors thank Elliot Block for his assistance in least-cost feed formulation and Vijay Chauhan for his helpful comments on the initial draft. The funding provided by Agriculture Canada for this study is greatly acknowledged. The useful comments and suggestions by the reviewers are sincerely appreciated. The authors are solely responsible for any errors or omission.
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McDowell, R. E. (1982). Crossbreeding as a system of mating for dairy production. Southern Cooperative Series Bulletin (July), p. 259. McDowell, R. E. & McDaniel, B. T. (1968a). Interbreed matings in dairy cattle. Economic aspects. Animal Husbandry Research Division. USDA. Beltsville, Maryland. J. Dairy Sci. 52, 1649-1658. McDowell, R. E. & McDaniel, B. T. (19683). Interbreed matings in dairy cattle. Yield, trait, feed efficiency, type and rate of milking. J. Dairy Sci. 51, 767-777. Menard, L. (1988). Economic analysis of first generation two breed crosses between holstein and ayrshire. Unpublished M.Sc. thesis. Department of Agricultural Economics, Macdonald campus, McGill University, Canada.
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Parekh, H. K. B. & Touchberry, R. W. (1981). Comparative reproduction performance of cross- breds and contemporary pure-bred dairy cattle: Heifers and their first calving dry period record. Indian J. Animal Sci. 51, 756-760. Rincon, E. J., Schermerthorn, E. C., McDowell, R. E. & McDaniel, B. T. (1982). Estimation of genetic effects on milk yield and constituent traits in crossbred dairy cattle. J. Dairy Sci. 65, 848-856. Smith, C. (1978). The effect of inflation and farm investment on the estimated value of genetic improvement in farm livestock. Animal Production 26, 10 1. Statistics Canada. Farm wages in Canada. Cat 21-002. Quarterly. Various issues. Ottawa. Touchberry, R. W. & Bereskin, B. (1966). Crossbreeding dairy cattle weights and body measurements of purebred holstein and guernsey females and their reciprocal crossbred. J. Dairy Sci. 49, 647.