The other day I listened to a well-known breeder vent about how his bull had been turned down by an AI unit because they had an equal quality sire of their own that cost them a lot less to procure. Can I say I was shocked? Nope. That’s because, since starting the Bullvine, we have been telling breeders who provide seed stock to AI units that those days are numbered.
It’s hard for me to look at this objectively. You see, when I look at it with my dairy breeder hat on, I am outraged at the whole scenario. But, when I look at this as a businessman, (something I am asked to do daily for many large corporations outside of agriculture), it just makes good financial and strategic sense.
I Hate To Say I Told You So…..
You see over a year ago in our article, How Genomics is Killing the Dairy Cattle Breeding Industry, we outlined exactly what was going to happen. We even put it in graphs to show clearly what and how and when it would occur. So now a year later, when exactly what we predicted is occurring, it is no surprise to us here at The Bullvine.
Now some would ask, ”If they are sampling 1/3 the number of bulls that they used to, why have sire procurement costs gone up? Well that’s simple. Even with the reduction in the number of sires, there has been a much larger increase in the price of each bull. Gone are the days when the average sire cost was between $5,000 and $10,000. Now the costs are currently approaching $100,000 for a top genomic sire. From the outside looking in, that looks like a big win for the seed stock producers. Of course things are not always as they appear.
What Does the Future Hold?
You see the AI companies cannot operate at a loss. Therefore, the AI units really only have three possibilities to combat the increased cost of sire procurement:
- 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. You see the largest segment of the marketplace (commercial producers) have no desire to pay more than the $10-$15 blend price they have already been paying. While yes the elite seed stock producer is prepared to pay more to get early access to truly special sires, the marketplace as a whole is not.
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 seek 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. Also, outside of pro sports, when organizations come together to create a false ceiling on prices, anti-trust laws tend to break that up pretty quickly.
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 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.
So it’s no surprise that large A.I. units are doing exactly that. Over the past year, the number of top 50 gTPI females owned or controlled by large genetic organizations has gone from 11 to 23. Give it another year and that number will probably reach 30 maybe even 40. “Why you ask?” There are two main reasons: First the larger A.I. studs and genetic corporations have the resources to IVF these females extensively, so they will have many more potential top progeny; Secondly, the breeders who do own the remaining 27 animals, will not have the revenue streams (bull and female sales) to support the continued IVF programs they are running, thus resulting in less potential list topping females.
What does this mean to Other AI Units?
Here at the Bullvine we took a lot of heat when we published Semex – The Rise and Fall of a Semen Empire. But even that article is proving to be accurate. You see, in this in-between period where A.I. units, especially those that used to sample massive numbers of bulls, are seeing insane cost savings, studs like Semex should be turning a much larger profit. Why is that you ask? Well it’s simple math. In this transition period the studs are paying next to nothing for the sires. That is because they don’t have to pay out the average $7,500 per sire that they used to, because most new sires are all on lease. This results in at least a $1,500,000 decrease in sire procurement costs alone for Semex, and that does not factor in the extra savings in operations, housing, marketing, genetic evaluation fees, etcetera. Add to that the increased revenue from higher young sire semen prices and you can see why Semex is having “Record Performance”. That record performance is more correctly the result of the transition caused by changes in the industry than it is better operations. The question now becomes, what happens to companies like Semex who refuse to own their own females, once this transition is complete and the cost savings period is over?
What does this mean for seed stock producers?
There are really only two options. Fight it or live with it? Recently I read a very interesting post on Facebook by dairybullsonline.com. In it they compared the current dairy industry with the 1960’s and 70’s NHL hockey scenario. That was when the players had not yet unionized and so they were receiving a small fraction of the profits. While this is certainly the same case in the Dairy Seed Stock world, there are some big differences between the two scenarios. The first and foremost difference is that, in the NHL’s case, when the players unionized they had control of the product. Yes the NHL owners could have gone out and gotten non-unionized players, but the product they put on the ice would have been far inferior. In the current seed stock world, that is not the case at all. As we highlighted earlier in this article, the large A.I. units and genetic corporations already own or control almost 50% of the top females, and that number is getting higher. That in itself is the greatest union breaker in the world.
So, when you factor in no bull sales and very limited female sales, the future does not look bright for the seed stock producers. You see if they start selling off their high-end females (the only females that are really worth anything), they you don’t have the next generation in their own program. But if they don’t sell, then they don’t have the revenue to support their own programs.
A little while back I had a great conversation with Ari Ekstein. It hit home. He was highlighting to me how there is still a good market for well bred, non-index cows. That is something their Quality herd has been able to produce generation after generation. (Read more: Quality Holsteins – Well-deserved Congratulations and Quality Cattle Look Good Every Day) Ari was highlighting several points. Today they don’t sell many bulls to the large studs. Also today they don’t see that many $300,000 calves being sold. However what they do have is a consistent market for selling high quality, young cattle to fellow breeders. As I look to the future, this may be the only true market that will survive in the near future. It’s already happening. If you look at the sale prices at the recent sales, genomic heifer prices are down almost 50%, while pedigree heifers have remained relatively unchanged. (Read more: An Insider’s Guide to What Sells at the Big Dairy Cattle Auctions 2013)
The Bullvine Bottom Line
As someone who loves the dairy industry more than anything (how many other people do you know that will lay in the piss just to take pictures at the cattle shows?), this is a hard message for me to share. When we first launched the Bullvine, it was my desire at that time, to also go out and buy many top females. My father had the exact same passion. The problem is that as we penciled out the numbers and did a five and ten year forecast, the numbers just didn’t work. So instead we have sunk our time and energy into producing the Bullvine, something we see as more viable over the long term. While yes we have purchased several animals over the past 2 years at some of the major sales, it was more from the passion mindset than because of the financial one. For other producers that are still investing heavily in top genomic females, I ask you to really look at the current marketplace and answer one question, “Where will my revenue be coming from in 10 years?” If you can’t answer that question specifically, maybe it’s time to rethink your whole business strategy. If you don’t, you could end up being a casualty of the genomic war.