Economic comparison of open and closed nucleus breeding schemes for wool production

AgrwulturalSy,~tem.~5 (1980) 71 83

ECONOMIC COMPARISON OF OPEN A N D CLOSED NUCLEUS BREEDING SCHEMES FOR WOOL PRODUCTION

L. P. JONES & K. M. NAPIER

University o/ Melbourne. Department oj Agriculture, Animal Research Institute, Werribee, 3030. Victoria. Australia

SUMMARY

Returns on investments in open or closed nucleus breeding schemes to improve clean wool production were examined using Hill's approach o f examining the flow o f genes through the population. Returns on capital in such schemes are competitive with many alternative investments on t h e / a r m if predictions oJ response are correct. For example, Jbr a typical case considered with heritability o/wool weight of O'4, standard deviation o / 0"4 kg, 90 °/o lambs weaned per ewejoinedji'om mature ewes, and 250 cents/kg clean, marginal returns on money invested in labour and materials in the breeding programme in excess o f 40 °/o were obtained. The return on the extra investnwnt with an open nucleus using 50 % oj base-born ewes in the nucleus was about 20 %. Returns are sensitive to cost, lambing percentage, price and heritability, the extra returnsJ~'om the open nucleus becoming more attractive as predicted response or price increases. The value o/the gains is not vet3' sensitive to numbers of age groups o/ewes or ranis.

Most o f the extra returns go to the commercial flocks, so premiums would need to be paid to the nucleus to provide incentives to maintain the breeding programme.

INTRODUCTION

For over twenty years, geneticists have been urging studs to use objective measurements to improve wool production of sheep. Adoption of recommended breeding practices has been disappointing with few leading studs making major use of objective measurement in their breeding programmes. In recent years there has been a more critical examination of the economics of 71

AgricuhuraISystems 0308-521 X/80/0005-0071/$02" 25 ~ Applied Science Publishers Ltd, England, 1980 Printed in Great Britain

72

L. P. JONES, K. M. NAPIER

breeding schemes (e.g. Hill, 1971). Thatcher & Napier (1976) examined the benefits from genetic improvement for the case of a wool producer breeding his own rams. They found that for a wool price of 200 cents/kg greasy and lambing percentage of 90 ~o, returns on capital of about 30 ~ was feasible. The case considered by Thatcher & Napier (1976) involved recording every twotooth sheep in the flock. Total costs may be lower for a stud supplying rams to a commercial producer where costs are confined to the stud and benefits extend to commercial producers as well. In recent years considerable publicity has been given to open nucleus breeding schemes (Shepherd, 1976). These differ from the traditional stud structure in that top producing ewes are transferred from the base flocks to the nucleus flock. The traditional stud structure is a closed nucleus, with a transfer of rams from the nucleus to the base flocks, and no transfer of sheep from the base to the nucleus. Jackson & Turner (1972) and James (1977) showed that an open nucleus structure could give up to 15 ~o faster improvement in a character under selection than a closed nucleus structure. However, open nucleus schemes have costs extra to those involved in a traditional stud situation, as they involve costs in selecting ewes in the base flocks as well as costs in transferring larger numbers of sheep between flocks. In the present study two main questions are considered: (1) (2)

What are the economic benefits from selection for wool production? Are the extra benefits from an open nucleus worth the costs above those involved in a closed nucleus?

METHODS

It takes several years before the genes from selected individuals are distributed evenly through a population. This causes fluctuations in returns in the early years of a selection programme (Thatcher & Napier, 1976). The approach of Hill (1974) has been used. This approach uses matrix algebra to describe the flow of genetic improvement through a population with overlapping generations. We have examined the returns resulting from one year's selection. Costs are incurred in year 0 and returns from extra wool production are obtained in future years. There is considerable fluctuation in early years as genes from the parents selected in year 0 flow through the population. The gains from one year's selection have been summed over the 30 years after selection. Returns in any year (t) are discounted to their value in the year of selection, by multiplying by 1/(1 + d)' where d is the discount rate. As the discount rate increases, gains in the early years become relatively more important. As costs are borne in the year of selection they are not discounted. The effect of discounting is described by Hill (1971). Returns from repeated selections can be readily computed with Hill's (1974)

ECONOMICS OF SHEEP BREEDING

73

approach by further discounting costs and returns to their value at the start of the programme.

Case considered The case considered is a stud or nucleus selecting primarily for clean wool production. Ewes are selected on greasy fleece weight while final selection of rams is based on clean wool weight with limited culling of other characters to prevent undesirable changes.

Assumptions used in the model Heritability (h 2) of clean wool weight = 0.4 Phenotypic standard deviation = 0.4 kg Price (less transport and marketing costs) = 250 cents/kg clean Death rate of rams and ewes = 5 ~0 per annum 90 ~ lambs weaned from older ewes Surplus young sheep are sold at 18 months of age. The two schemes being compared are:

Closed nucleus. Fleece weights of all males and females are measured in a ram breeding flock (the nucleus) at 15 to 18 months. The best of each sex are used in the nucleus. Surplus ewes from the nucleus and the next best rams are transferred to other flocks (the base). No sheep are introduced from the base to the nucleus, and no males born in the base are left entire. Open nucleus. This is similar to the closed nucleus except that fleece weights of all females in the base are also measured at 15 to 18 months. The young ewes from the base are transferred to the nucleus so that half the adult ewes in the nucleus have been born in the base. A typical case we used had 2 age groups of rams in the nucleus and the base, and 4 age groups of ewes in the nucleus and the base. The nucleus was 10 ~o of the total flock. The effects of varying this structure, and also the lambing percentage are evaluated. Costs o! breeding programmes in considering costs we assumed that correction is made for known environmental penalties such as being born a twin or the progeny of a two-year-old ewe. With the open nucleus we assumed that such corrections are also made for ewes born in the base. Costs we have assumed are: identification of lambs in the nucleus costs 50 cents per head, identification of ewe lambs in the base costs 50 cents per head, fleece weighing costs 7 cents per head,

74

L. P. JONES, K. M. N A P I E R

fleece testing of rams costs 400 cents per head, transferring rams and ewes between nucleus and base costs 250 cents per head. When these costs are expressed per ewe in the total system they are as shown in Table 1. TABLE 1 COSTS PER EWE IN THE TOTAL SYSTEM FOR A NUCLEUS BREEDlNG SCHEME

Source

Open nucleus

Closed nucleus

5 22 3.8 4 5.2

5 -0.7 4 2-3

40 c e n t s

12 c e n t s

I d e n t i f i c a t i o n o f n u c l e u s ewes I d e n t i f i c a t i o n o f b a s e ewes Fleece w e i g h i n g Ram testing costs Transfer costs Total

It must be realised that costs will vary between schemes depending on the situation and knowledge of the operator. Individuals can readily substitute their own costs in the comparisons discussed later in the paper.

Description of scheme in relation to Hill's model In relation to Hill's (1974) paper we are using a model where different selection differentials are used to select individuals for the nucleus and base. The relevant prediction of response in any year requires his E matrices. The P, Q, F_~ and Ef matrices can be divided into 16 sub-matrices describing nucleus (N) males (~) to N~, N9 to N~, base (C) males to N3', C~ to N ~ . . . C~ to C?. In the E m matrix all terms are zero except for first row of N. to N~, N. to N~ and Ef non-zero rows are C. to C~, C. to C~. Transfer of animals was described by the Q matrix. Thus in the open nucleus system half the nucleus females aged two years were nucleus females aged one year last year, and half were base ewes. In the second row of Q appropriate to nucleus females, terms of 0-5 and 0.5 were used to describe this transfer. This differs slightly from the examples of Hill (1974) where all terms in Q were zero or unity. We have assumed that age of parent has no effect on the chance of selection and that all selected animals are kept for the same time except for deaths or other misadventure.

RESULTS

Returns from one year's work Cumulative discounted gains from one year's work for the typical case of 2 age groups of rams and 4 age groups of ewes are shown in Fig. 1. Clearly, the value of the

ECONOMICS OF SHEEP BREEDING

75

Breeding Scheme Discount rate ---

OPEN CLOSED

* •

20% 40%

200 RETURNS (cents per ewe)

100

10

20

30

Time (years)

Fig. 1. Cumulative returns for one year's selection. gains is very sensitive to d i s c o u n t rate. This is expected as it can be shown that if the u n d i s c o u n t e d value in all years were c o n s t a n t , the sum to infinity o f d i s c o u n t e d gains is inversely p r o p o r t i o n a l to the d i s c o u n t rate (d). F u r t h e r , the gains in early years become relatively m o r e i m p o r t a n t as the d i s c o u n t rate increases.

Total returns f r o m one year's work T h e c u m u l a t i v e value over 30 years o f the returns is shown in T a b l e 2. Both o p e n a n d closed nucleus schemes are profitable even at 40~o interest. However, the e x t r a investment in the open nucleus w o u l d not be p a i d back at 40 °/0. The return on the extra investment would be a p p r o x i m a t e l y 20 ~0. Effect oJgains in the current flock As the o p e n nucleus involves m e a s u r e m e n t o f all y o u n g ewes in the base flock, the extra p r o d u c t i o n in s u b s e q u e n t years o f these sheep over a flock with r a n d o m culling TABLE 2 CUMULATIVE VALUE OVER

Open nucleus Closed nucleus Difference

30

YEARS FROM SELECTION DONE IN THE FIRST YEAR (CENTS/EWE)

0

10

1093 929 164

310 253 57

Interest rate (%) 20 30

40

Cost

144 114 30

59 47 12

40 12 28

86 68 18

76

L. P. JONES, K. M. N A P l E R

would reduce costs to some extent. The extra benefits would be worth 21 cents per ewe at 20 3/0 interest and 15 cents at 40 ~o and would reduce costs o f the open nucleus scheme accordingly. However, much o f this extra production could be obtained more cheaply with limited identification and in some cases by visual selection, so we have ignored this c o m p o n e n t in c o m p a r i n g costs and returns.

EJ]ect of the number oj age groups The total returns with different numbers of age groups of males and females are shown in Table 3. TABLE3 TOTAL RETURNS FROM ONE YEAR'S SELECTION WITH DIFFERENT NUMBERS OF AGE GROUPS AT 20 ~ INTEREST

Nuc&us

Base

nmt

nf

nm

nf

2 2 2 3 2 2 2 2 4 2

4 5 6 6 4 4 4 4 6 5

2 2 2 3 2 2 3 3 4 4

4 5 6 6 5 6 5 6 6 6

+ rim, nf are

Open nuc&us

Closed nuc&us

D~]krence

144 137 130 123 140 136 136 132 114 124

114 109 104 98 110 106 108 103 90 99

30 28 26 25 30 30 28 29 24 25

number of age groups of males and females.

The value o f the extra production is not very sensitive to numbers o f age groups. Values are in line with the suggestion that a rapid turnover o f generations gives greatest response. However such a policy involves extra costs c o m p a r e d with a flock kept until normal culling ages. These include reduced lambing percentage and hence reduced numbers for hogget shearing and reduced n u m b e r o f hoggets for sale. Also, Bichard et al. (1973) and H o p k i n s & James (1978) showed that if more replacements are selected from progeny o f younger age groups, genetic gains are less sensitive to the numbers o f age groups.

Payback period The expenditure involved in one year's selection is repaid in three years for a closed nucleus at 20 ~ interest, while that in an open nucleus is repaid in five years.

Cash flow In a continuous selection p r o g r a m m e costs accumulate in the early years before returns from genetic gains are realised. The discounted cash flow is shown in Fig. 2 for 20 ~o interest. Costs in all years are also discounted to their value in year 0. Again the cumulative profits exceed costs after five years for the closed nucleus and after

77

ECONOMICS OF SHEEP BREEDING

500 --OPEN ---CLOSED

400

/

o/

/ t'

300 DISCOUNTED CASH FLOW (cents per ewe) 200

¢

,

/I

i

/

g /

oI

/'g/ -10

L ....

I

J

I

10

20

30

Time (years) Fig. 2.

Discounted cash flow of a continuous selection programme at 20 % interest.

seven years for the open nucleus at 20 ~o interest. Profits from the open nucleus exceed those of the closed nucleus after 25 years. The peak indebtedness of the open nucleus is 70 cents per ewe in year 3. In the closed nucleus it is 20 cents per ewe in year 2.

Effects of price and heritability The value of gains is directly proportional to price, heritability and phenotypic standard deviation. A producer anticipating a higher (or lower) price can predict gains by multiplying values in tables and figures by the relative price (see Table 4). TABLE 4 EFFECTS OF PRICE ON V A L U E OF R E T U R N S ( C E N T S / E W E ) A N D P R O F I T A T 2 0 % INTEREST

Price/kg 200 250 300 350

Cost

Open nucleus Return

Profit

Cost

Closed nucleus Return

Profit

40 40 40 40

115 144 173 252

75 104 133 212

12 12 12 12

91 114 137 160

79 102 125 148

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L. P. JONES, K. M. NAPIER

Similarly if he anticipated only 80 ~ of response, values would be reduced. The return on investment increases with price as does the attractiveness of the open nucleus.

Value of selection in the base flocks The open nucleus combines the benefits of selection in the base flocks with those resulting from transferring superior animals to the nucleus flock. Selection in the base flocks without transfer would give gains about half-way between the open and closed nucleus (128 cents per ewe compared with 144 and 114 cents for open and closed nucleus respectively).

Effect of heritability being different in base Estimates of heritability have generally been based on data corrected for environmental penalties such as type of birth and age of dam. It may be feasible to do this in a nucleus flock but often it is not practicable in the base flocks. In such cases TABLE 5 EFFECTS OF DIFFERENTHERITABILITYIN THE NUCLEUSAND BASEON RETURNS(CENTS/EWE)

Type o f system Open nucleus Open nucleus Open nucleus Closed nucleus

2 N 2 hB/h

Returns

Profit

100 ~ 70 ~ 50 ~o *

144 133 125 114

104 93 85 i 02

• No selection in the base flocks. the heritability will be lower in the base flocks and the advantage of the open nucleus reduced. Table 5 shows the returns for a range of heritabilities in the base flocks (h 2) relative to that in the nucleus flock (h2).

EjJect of lambing percentage As the lambing percentage increases the selection differentials can be increased and returns are obtained from an increased number of young sheep being shorn. As a result, returns of the breeding programme are increased as are the extra returns from the open nucleus (Fig. 3).

Effect of keeping wethers several seasons Returns on the investment are increased where wethers are kept several seasons and the open nucleus becomes relatively more attractive (Table 6).

Distribution of benefits to nucleus and base As the bulk of the benefits accrue in the base flocks we need to know the relative proportions going to the base. For a closed nucleus with 10 ~ of the total flock in the

79

ECONOMICS OF SHEEP BREEDING

200

150 RETURNS (cents per ewe

N

y

/- / *" / /"

/"

---CLOSED

./

J

10( •t

I

70 Fig. 3.

I"

I

I

I

80 90 100 LAMBING PERCENTAGE

I

I

110

120

Effect of lambing percentage on cumulative returns from one year's selection at 20 % interest.

nucleus, about 85 ~o of benefits go to the base flocks. Where the nucleus is owned by a different producer from the base flocks, the owner of the nucleus would require a premium to justify his investment. The total value to a commercial producer of one year's selection with 900 sheep would be 980 dollars at 20 ~ interest. Thus he could invest as much as this on ram purchases. If he were buying nine rams per year he could pay a premium above an unselected ram of 109 dollars each at this interest rate. Similarly the value to the nucleus owner would be 161 dollars which would cover costs of the breeding p r o g r a m m e (120 dollars). However, at 40 ~o the value to the nucleus would be only 75 dollars so he would need a total premium of 45 dollars on sale rams. TABLE 6 RETURNS (CENTS/EWE) WHEN WETHERS ARE KEPT SEVERAL SEASONS AT

Wethers sold aJier 1st adult shearing 2nd adult shearing 3rd adult shearing

20 %

DISCOUNT RATE

Open nucleus

Closed nucleus

Difference

144 175 200

114 139 159

30 36 41

80

L. P. JONES, K. M. NAPIER

Lag in response In any breeding programme the base flock will lag behind the nucleus. In a closed system with average rams used in the base this lag is two generations. Use of above average rams reduces this lag. The lags for the systems used here are shown in Table 7 together with the equilibrium rate of response. Selection in the base flock reduces this lag. Also the larger the nucleus the lower the lag for both open and closed nucleus systems. TABLE 7 RESPONSE LAG FOR OPEN AND CLOSEDNUCLEUSSYSTEMS

Open nucleus Closed nucleus Closed nucleus with selection in base

Equilibrium response per year (kg)

Difference between nucleus and base (kg)

Lag in years

Lag m generations

0.0869 0.0780

0.24 0.27

2.76 3.50

0.93 1.17

0.0780

0.18

2.36

0-79

DISCUSSION

The results show that costs associated with a breeding programme will be recouped with either an open or a closed nucleus, if our predictions of rate of genetic improvement are achieved. The extra investment with an open nucleus gives a lower return on capital than that in setting up the nucleus itself. However, it will often provide a return competitive with other farm investments. In the analysis we have compared the response obtained from a nucleus breeding scheme with that where there is no attempt at genetic improvement. A more fair comparison is with alternative programmes. Costs can be reduced by not identifying twins or progeny of young ewes. This can reduce the rate of genetic improvement for wool production by up to l0 ~o due to lower heritability and increased generation interval. It will also act to reduce the frequency of twins and so will select for reduced fertility. Further, visual selection can be used to rank sheep for clean wool weight. While published results have found that the correlation between visual assessment and clean wool weight is 30~o to 5 0 ~ (Riches & Turner, 1955; Morley, 1955), Napier et al. (unpublished results) found that a classer could be up to 80 ~o as efficient as fleece weighing in assessing clean fleece weight. In order to see whether the extra investment involved in the breeding programme using measurement and identification over that on visual assessment only is justified, we need to have an assessment of the relative efficiency of the classer and the savings in costs. For example if we anticipate the gains of the alternative programme to be 60 ~o efficient and costs to be reduced to one quarter we can adjust figures in Table 2 accordingly. Such a programme is compared in Table 8.

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81

TABLE 8 COMPARISON OF A CLOSED NUCLEUS USING MEASUREMENT WITH A SCHEME BASED ON VISUAL ASSESSMENT

20% discount Objective Visual Cost Returns Profits

12 114 102

3 68 65

40 % discount Objective Visual 12 47 35

3 28 25

For the case shown the objective scheme is still worthwhile even at 40 ~o. Clearly, the better the classer, the lower the return on the extra costs with an objective scheme. In practice, losses in accuracy resulting from penalties to twins and progeny of young ewes may reduce gains more than use of visual assessment itself. Combinations of objective and partial classing may be used to reduce costs. Similar estimates of returns on investments can be made relative to that in Table 8 if assumptions are made of the relative efficiency. In this paper we have assumed that the goals of open and closed nucleus schemes are the same. The development of open nucleus schemes often resulted from dissatisfaction by commercial producers with the goals of traditional studs. Where there is this dissatisfaction a nucleus scheme would be justified, and in the establishment phase, pooling of superior sheep from all contributors gives an early lift in genetic merit (Jackson & Turner, 1972). Here we have considered only the extra returns from the open nucleus once it is established. Before considering an open nucleus it is important to consider whether or not to invest the extra money in ensuring that the nucleus is managed to give maximum rate of improvement. Where the management of the breeding programme in the nucleus is superior to that in the base the optimum transfer rate of ewes from the base to the nucleus is reduced, as is the superiority of the open nucleus scheme over a closed nucleus scheme (Hopkins & James, 1978). In evaluating breeding schemes we need to consider the appropriate discount rate which will be that of competitive enterprises. Part of the gains in current investments stems from inflation which can be accommodated by making assumptions regarding price of the product relative to inflation. In this study we have assumed constant price, lfthe price of wool increases with inflation we are interested in the returns over and above inflation so we can choose a lower interest rate. Long-term trends in price may lead a producer to believe that price will not keep upwith inflation so his interest rate can be adjusted accordingly. Smith (1978) suggests we consider investment relative to the long-term inflation-free rate of return which may be as low as 3 ~o. However, investment must be considered relative to competitive investments because capital will be limiting so that the rate he suggests may not be realistic. Smith (1978) also raises the question of risks. These arise from two sources; (1) uncertainty about prices and (2) uncertainty about predicted gains. Agricultural prices have fluctuated greatly except where they are tightly controlled. Also, realised genetic

82

L. P. JONES, K. M. NAPIER

responses have differed from prediction in some selection lines of sheep (Pattie & Barlow, 1974; Turner, 1977). Such divergence f r o m expectation is expected from genetic drift, and shown by the fact that variation has been f o u n d a m o n g replicate selection lines in l a b o r a t o r y animals ( F r a n k h a m et al., 1968). A n u m b e r o f approaches have been used in considering risk. Dillon (1971) advocates the utility function to consider risk. Alternative approaches are to use a higher discount rate than with a risk-free investment. If a producer fears that either prices or genetic gains are likely to become lower he can adjust values in figures and tables accordingly or he can choose a higher discount rate. l f h e fears costs are going to be higher than we have assumed, he can subtract his own estimate of the cost from the present values in the tables. Extra costs m a y be incurred, for example for disease control. These m a y be greater with a two way flow o f sheep in an open nucleus than the one way flow in a closed nucleus. The biggest problem is likely to be the distribution o f profits between nucleus and base. It is i m p o r t a n t the nucleus owner be paid a premium which makes his investment worthwhile. The returns on investment for either open or closed nucleus are competitive with m a n y alternative farm investments.

ACKNOWLEDGEMENTS The authors wish to acknowledge the financial contribution f r o m the W o o l Research Trust Fund.

REFERENCES BICHARD,M., PEASE,A. H. R. & OZKUTUK,K. (1973). Selection in a population with overlapping generations, Anita. Prod., 17, 215-27. DILLON,J. L. (1971). An exploratory review of Benoullian decision theory, Rev. Mark. Agric. Econ., 39, 3-80. FRANKnAM,'R.,JONr.S, L. P. & BARKER,J. S. F. (1968). The effects of population size and selection intensity in selection for a quantitative character in Drosophila, Genet. Res., Camb., 12, 237-48. HILL,W. G. (1971). Investment appraisal for national breeding programmes, Anita. Prod., 13, 37-50. HILL,W. G. (1974). Prediction and evaluation of response to selection with overlapping generations, Anim, Prod., 18, 117-39. HOPKINS, I. R. & JAMES,J. W. (1978). Some optimum selection strategies and age structures with overlapping generations, Anita. Prod., 25, I I 1-32. JACKSON,N. & TURNER,H. N. (1972). Optimal structure for a co-operative nucleus breeding scheme, Pro¢. Aust. Soc. Anita. Prod., 9, 55-64. JAMES,J. W. (1977). Open nucleus breeding schemes, Anita. Prod., 24, 287-305. MORLEY,F. H. W. (1955). Genetic improvement of Australian Merino sheep, Agric. Gaz. N.S.W., 66, 526-31. PATTIE,W. A. & BARLOW,R. (1974). Selection for clean fleeceweight in Merino sheep. I. Direct response to selection, Aust. J. Agric. Res., 25, 643-55. RICHr.S,J. H. & TURNER,H. N. (1955). A comparison of methods of classing flock ewes, Aust. J. Agric. Res., 6, 99-108.

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SHEPHERD,J. H. (1976). The Australian Merino Society nucleus breeding scheme. In: Sheep breeding (eds G. J. Tomes, D. E. Robertson and R. J. Lightfoot), West. Aust. Institute of Technology, Perth, pp. 188-99. SMITH, C. (1978). The effect of inflation and form of investment on the estimated value of genetic improvement in farm livestock, Anita. Prod., 26, 101-10. THATCHER, L. P. & NAPIER, K. M. (1976). Economic evaluation of selecting sheep for wool production, Anita. Prod., 22, 261-74. TURNER, H. N. (1977). Australian sheep breeding research, Anim. Breed. Abs., 45, 9-31.