There is no question that the introduction of genomics to the dairy cattle industry has greatly accelerated the rate of genetic advancement (Read – The Genomic Advancement Rate – The Battle for Genetic Supremacy) and could kill the seed stock industry as we know it. Read on.

The Introduction

When artificial insemination companies first started using genomics to help identify which bulls had the genetics to excel and which bulls didn’t, it had the following effects

The number of young bulls needing to be sampled decreased.

The number of young bulls needing to be sampled decreased.

The cost of procurement went up slightly since their are capped leases and actually less risk.  Some bulls where still purchased outright

The cost of procurement went up slightly since their are capped leases and actually less risk. Some bulls where still purchased outright

Bull sampling costs decreased due to needing to sample less bulls and not having to pay as many incentives.

Bull sampling costs decreased due to needing to sample less bulls and not having to pay as many incentives.

Semen prices have gone from being paid to use it, to costing as much as a daughter proven sire

Average semen price has increased greatly.  As young sire semen prices have gone from being paid to use it, to costing as much as a daughter proven sire

Due to the increase in average semen price revenues have gone up sharply

Due to the increase in average semen price revenues have gone up sharply

With increased revenue (young sire semen price) and decreased expenses (cost of sampling) profits have gone up significantly

With increased revenue (young sire semen price) and decreased expenses (cost of sampling) profits have gone up significantly

What will happen in March 2013

As of March 2013, breeders will have the ability to test their own bulls before negotiating the deal with the A.I. company, resulting in a much greater negotiating position for bull breeders. The estimated effects are as follows:

The number of young sires sampled will not change

The number of young sires sampled will not change

The cost to actually sample a sire will stay low

The cost to actually sample a sire will stay low

With open ended leases and increased competition the cost of procurement could go way up and could even hit the $1M mark per proven bull.

With open ended leases and increased competition the cost of procurement could go way up and could even hit the $1M mark per proven bull.

Semen sales price will not change

Semen sales price will not change

Revenue will stay the same

Revenue will stay the same

With greatly increased procurement expenses profits will decrease drastically

With greatly increased procurement expenses profits will decrease drastically

How Will A.I. Companies React?

There are not substantial enough profit margins in the A.I. industry to support such a change in profitability. As a result, A.I. companies will be forced to do the following:

  • Increase semen price
    Since they now have greater expenses, A.I. companies will be forced to increase price. As demonstrated in many other industries, the market will not respond favourably to this and ultimately will drive prices back down.
    END RESULT: No change
  • Cap contracts
    So if A.I. companies cannot increase revenues they will have to try and cut their costs. The procurement of sires will become the major expense they will look to control. One way to do this will be to cap bull contracts. However, as the NHL has shown us, even if they could introduce a cap, some members will break that rule and other breeders will not stand for it.
    END RESULT: No change
  • Produce their own product line
    If A.I. companies cannot buy the bulls at a cheaper price, then they will have to go and buy females and produce their own product. This will lead to cheaper acquisition costs. A.I. companies can now buy the females for $50,000 to $250,000 and only need to have that female produce one son. That will still be cheaper than leasing the sire on an open lease. This also allows them to have greater control of their bloodlines, accelerate their genetic advancement and develop their own distinctive product.
    END RESULT: Cheaper product development costs and a distinctive product.

What does this mean to the average seed stock producer?

For the initial stage, when A.I. companies are buying into the female side, prices will rise. Once they have the base genetics, they will not need to buy any more and they will stop buying. (Read – Should A.I. Companies Own Females and Select Sires v.s. Semex – A Contrast In Cooperatives)

If you look at the current substantial increase in the prices of genomic heifers, you will notice that it is the current seed stock breeders who are buying and trying to get ahead. The money for this is not coming as much from the female side as it is from the current or future revenue potential from the semen lease deals. These people will be out of the market as more and more A.I. companies STOP leasing from these bull breeders because they are now producing their own genetics.

This will leave the seed stock breeder with a product or cattle that do not top the lists like they used to. Also, now the A.I. companies will not release their new high genomic sires until they have mated them on all their own females first. This will give A.I. companies a substantial advantage in generating list toppers. Bull breeders, on the other hand, will not have the lease deals that they currently enjoy, so they will not have any revenues from the sale of high index animals.

I believe that the show market will survive, since they are not as dependent on genetic advancement alone since they use a combination of genetics, management and chance. This is something I will explain further in a future article.

The Bullvine Bottom Line

The introduction of genomics first started off by generating greater profits for A.I. companies. Currently it is contributing to greater sales for seed stock producers. Ultimately it will lead to decreasing profits for A.I. companies and they will seek to regain control. The only way to do that will be to control product development —-it will either be do that or go broke. This will lead to the industry becoming dominated by whatever players are able to build the largest self-contained genetic pool and advance their genetics ahead of everyone else’s.

What can the average seed stock producer do? (Watch for the answer in a future article.)

 


The Dairy Breeders No BS Guide to Genomics

 

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