Archive for Artificial Insemination Industry

What Color Do You Bleed?

Friday, May 31st, 2013

There is no question dairy breeders as a whole are a very passionate group.  For the most part, it’s not a “line of work” you get into for the money.  Between the equity burden and the long hours, it also doesn’t appear to be a “sexy” choice in the opinion of outsiders looking into the industry.  But the one thing that all those who are in the industry know is that breeders are also extremely loyal.  And the one area where most breeders demonstrate this insane loyalty is to the A.I. companies they purchase their semen from.  They pretty much bleed the colors of the A.I. company they support.

Such brand loyalty is something companies like Apple and Coke would die to have.  While these two massive global brands spend billions in marketing to build brand loyalty, A.I. companies have done it in a very different way.  They have done it through generation after generation of brain washing.  That’s correct brain washing.

Is there any difference in the major A.I. companies?

Recently my staff was working on some brand research for GE and I gave them the exercise to look at the Artificial Insemination market and look at each of the major A.I. companies and tell me how each company was different.  You know what they found?  Nothing!  For the most part they are all within 5% of each other for product offering.  While some do offer a few more services, they all, for the most part, offer the same service.

This really got me to thinking, and remembering my days of running the roads selling semen.  It actually made sense.  When I went into herds that were well established and had been operating for generations, they pretty much bled the color of their local A.I. cooperative.  However, when I went into herds that were new to the industry or herds where the operators came from other countries, I found them much more open to what I had to say.

While many of the companies are trying to position themselves differently in the market like Wal-Mart, Apple and Amazon in reality there really isn’t any difference.  (Read more: A Wake-Up Call to All A.I. Companies)  Even in our article, Semex – The Rise and Fall of a Semen Empire, we highlight how Semex grew rapidly and developed an extremely loyal following around the world by being different, by breeding “the Canadian Kind”.  However, as they got bigger they started to lose their focus on what made them different and now from an outsider looking in it would appear to be no different from all the rest.

Thinking about this I wonder how much breeders are limiting their genetic advancement due to loyalty to a certain A.I. company?  Yes there is not a great difference when you average out the top sires from each company, but why do you seek to be average?  Wouldn’t it be best to just use the best each company has to offer and forget the rest?

I think part of the problem is that there seems to be very little difference between the top sires.  Something I was shocked to see is that Canadian Dairy Network actually accentuates the issue.  Instead of promoting how the LPI formula was better at spreading out the top sires and differentiating them, they actually adjusted the formula to make them all closer?

Now I have had it said to me that this was done at the request of the large A.I. companies because they wanted to sell more proven sire semen and needed the genomic test sires to look less attractive.  There is some logic behind this, because young sires do produce less semen and there always seems to be a limited supply (Read more: $10,000 a dose Polled Semen and $750 Dollar Semen! Are you crazy?).  But the breeder in me says, “What’s more important marketing semen or genetic advancement?”

The Bullvine Bottom Line

Sure the A.I. companies will give you nice hats, maybe even a few coats and shirts, but is that enough to trade your future for?  As we have more and more options of companies to purchase semen from, and more and more ways to purchase the semen, I ask you three important questions.  ”How much of your semen purchase is dictated by tradition or brand loyalty?”  Moreover, “Is your decision based on what is genetically best for your herd?”  And finally “Who bleeds for your bottom line?”

 

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Just about a year ago we drew attention to  the fact that, when Dairy Breeders could genomic test their own bulls, it would start to cause the beginning of the end of the seed stock business (Read more: How Genomics Is Killing The Dairy Cattle Breeding Industry).These predictions were pretty easy to make because  these changes were  necessary in order for A.I. Companies to thrive in this new genetic environment.  With March 2013 now behind us and breeders able to genomic test their own sires, these predictions are coming true.  The challenge with these changes is that, while they make great business sense for the artificial insemination companies, they could spell the end of the seed stock business, as we have known it

At the recent Farnear Focus on the Future Sale, Alta Genetics paid $185,000 for a Massey daughter from Larcrest Case VG-86-2yr with a gTPI of +2505 (Read more: Farneer Focus on the Future Sale Averages $15,471 on 112 lots) .  While Alta Genetics owning females is not  new (Read more: Should A.I. Companies Own Females?), it does mark the resurgence of their program and certainly a significant investment by Alta Genetics probably indicating  that they are looking for new ways to control their sire procurement costs.  Of course Alta Genetics is not the only A.I. company that currently owns females.  Others, especially some of the smaller companies, have taken to owning top females in order to secure procurement of valuable and unique genetics and to differentiate their genetic offering (Read more: A Wake-Up Call To All A.I. Companies).  There are also those who have taken a very public stance against ownership of females (Read more:  Select Sires vs. Semex – A Contrast in Cooperatives).  This too may be a move to watch, as the competition for breeder-bred bulls will decrease with less competition for them from other A.I. companies.  Thus Semex and others too may start to see procurement costs subside.  Of course the market will decide just how low this price will go, as the other studs will always be watching the cost of production versus the cost of procurement.

What Has Caused This to Happen?

Since March 2013, breeders have had the ability to test their own bulls before negotiating the deal with an A.I. company.  This results in a much greater negotiating position for bull breeders.  The estimated effects of this change are as follows:

The number of young sires sampled will not change
The number of young sires sampled will not decrease further
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 A.I. Companies are Reacting

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 are being forced to take one of the following actions:

  • 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 favorably 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 A.I.  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 out 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 son 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 YOU the average seed stock producer?

For the initial stage, which we are currently in, as A.I. companies buy 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.  Also currently we see top genetic breeding programs investing more in the top .1% of the genetics market.  The money for this is not coming as much from the female side as it is from the current or future revenue potential of semen lease deals.  The problem is that these bull breeders will be out of the market, as more and more A.I. companies STOP leasing from them, because they are now producing their own genetics.

With A.I. companies starting to own more of the top genetics, especially in the health and fertility and polled bloodlines( an area the market is heading to in the future) 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 the same revenues from the sale of high index animals.

The Bullvine Bottom Line

Nobody likes to be told “I Told You So” and the reason I bring this up is not to do that, but rather to open the eyes of breeders to what is happening and what the future still holds.  While there will always be a seed stock business selling females to other breeders, as the bull market continues to change, so will the prices for the top genomic females.  You will continue to see a spike for a few years, while the genetics companies stock up on top genetics.  However, after that, you will start to see prices drastically decline.  Your best course of action would be to ride the wave while it lasts, and then plan on all future sales/revenue (3-4 years from now) to start to be from females only, with only a very small, select group of sires being contracted by A.I. companies in the future.


The Dairy Breeders No BS Guide to Genomics

 

Not sure what all this hype about genomics is all about?

Want to learn what it is and what it means to your breeding program?

Download this free guide.

 

 

 

 

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

 

Not sure what all this hype about genomics is all about?

Want to learn what it is and what it means to your breeding program?

Download this free guide.

 

 

 

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