The Valuation of Bull Characteristics
Jenna Smith, Graduate Student and Ken Foster, Professor and Interim Department Head
Beef producers depend heavily on their bulls when making genetic improvements in their herds. Bulls account for more rapid improvements in heritable traits in cattle than do cows, because a single bull sires multiple offspring each year. For example, Ron Lemenager (2005), professor in the department of animal science at Purdue University states, 85-90% of the genetics within a herd comes from bulls used in the last three generations assuming that replacement heifers are kept each year. That is why the selection of a new herd bull is an important aspect of beef production. A variety of factors are driving renewed emphasis on genetic progress in beef cattle production. Increased feed costs are placing pressure on cattlemen to improve productive traits like rate of gain and feed efficiency. At the same time, consumer attitudes toward beef continue to evolve placing pressure on producers to address meat quality traits when making breeding stock decisions.
Changes in Beef Consumption
When selecting a new herd bull, beef producers evaluate different bulls looking for desirable characteristics that will be passed on to offspring hoping their selection will result in a more profitable herd. This is of even more concern because per capita consumption of retail beef declined by 11.5 pounds per person between 1980 and 2003 (United States, Food, 2006). During the demand decline, there was a shift in the beef industry towards the promotion of differentiated and value added products, such as Certified Angus Beef, Laura’s Lean, and organic beef, where quality standards are set in order to be included in that product line. Producers of these specialty products place greater emphasis on bull selection in order to meet the certified beef program requirements. Consumer demand also seems to have changed with greater emphasis on lower fat and cholesterol intake. This, in turn, creates an incentive for cattle producers to pay more attention to the consumptive traits of the meat derived from the animals they produce. One of the problems faced by both, the breeders who supply bulls and the purchasers of bulls, is that the attributes of bulls come bundled together so that it is difficult to determine what the value of specific improvements in a bull might be worth. Consequently, it is difficult for them to make sound economic decisions concerning trade-offs between competing genetic improvements.
The Price of a Bull
A value for a specific attribute of a bull can be found within the bundled price through the use of hedonic pricing. This approach allows one to estimate the values that beef producers implicitly place on particular characteristics, such as consumptive and productive traits, when deciding which bull will maximize the profit of their farm. By knowing what traits producers value most, a bull producer would then be able to focus his/her efforts on producing bulls that are of greater value to the buyer. In addition, buyers of bulls might be able to use this information to avoid overpaying or to avoid offering a price that is too low and miss an opportunity.
Hedonic pricing posits that the price of a good is the combination of the values of the individual characteristics that make up that good. Therefore, a good is a collection of characteristics that are sold as one basic unit for one observed price. The overall price of the good consists of the sum of the values of the individual characteristics. These unobservable values of characteristics are often referred to as implicit prices. While the values of attributes that bulls possess are not directly observed, comparing the observed prices paid for bulls that possess different attributes allows estimation of the implicit prices that buyers were willing to pay and sellers are willing to accept for the various attributes. Beef producers (the buyers of bulls) respond to prices and premiums that reflect the derived demand for cattle in the packing industry and deduce the values of consumptive traits such as ribeye area.
In the case of productive traits, a producer would be able to recognize the value of the desired traits through lower cost of production. For example, if it takes less feed to get cattle to market weight, then producers would recognize the decrease in feed cost due to more rapid rate of gain and better feed conversion. To the extent that the use of a bull improves such performance among its offspring, the producer would pay a marginally higher price for this greater profit potential.
Background Information and Data
We used various productive and consumptive traits of bulls sold in the biannual Indiana Beef Evaluation Program (IBEP) sale to estimate specific implicit prices for the selected traits. Sale information collected from the fall 1998 to the fall 2005 were analyzed. These sales included 1,145 bulls of Angus, Charolais, Simmental, Hereford, Chiangus, Limousin, Maine Anjou, Red Angus, Gelbvieh, Salers, Gelbvieh Balancer, Shorthorn, and crossbred Angus genetics sold in an auction format. Productive traits included in the analysis were 365-day weight, birth weight, and average daily gain while consumptive traits consisted of intramuscular fat, ribeye area, and rib fat. Information about the productive and consumptive traits analyzed was given to buyers at the IBEP program sales along with information about breed averages for specific traits in the IBEP sale catalog. Information on the minimum, maximum, and mean values for the various attributes appear in figure 1 (click here to view Figure 1).
Valuation of Bull Characteristics
As one might expect, the results on ribeye area suggest that buyers value a larger ribeye area more than a smaller one. Figure 2 shows a graph of the implicit price of ribeye area that reveals the value a buyer would be willing to pay for an additional square inch of ribeye area at the mean sale price of $1,838.36 for the bull. Interpreting it for a specific value such as a 12.8 square inch ribeye reveals that a buyer would be willing to pay an additional $80.39 for a bull with an additional square inch of ribeye area. As the plot in figure 2 shows (click here to view Figure 2), if the bull possessed a smaller ribeye, a buyer would be willing to pay more for an additional square inch, everything else equal. Likewise, if a bull possessed a larger ribeye, a buyer would be willing to pay less for the additional square inch. It is important to note that the implicit price should only be calculated for the values that fall within the range of ribeye areas that are included in the analysis. Anything outside this range should not be used to calculate the implicit price of ribeye area because it may not be accurately depicted by this analysis.
The rib fat variable is estimated by ultrasound at the 12th rib and adjusted based on the breed. Figure 3 (click here to view Figure 3) is a graph of the implicit price of rib fat varying from 0.08 to 0.67 inches at the mean sale price. A surprising result revealed by the graph is that buyers value a bull that has some rib fat because there is over $2,000 given to an additional inch of rib fat if the bull only has 0.08 inches at the mean sale price. This indicates that buyers recognize a need for a minimum amount of “finish” on all animals regardless of the demand for leaner beef because of the flavor imparting and moisture enhancing characteristics of fat.
The measurement for the percent of intramuscular fat is done by ultrasound and then adjusted to 365 days of age. It is a measure of the marbling in the carcass, thus ultimately influencing the carcass quality grade. The graph of the implicit price of intramuscular fat, at the mean sale price, appears in figure 4 (click here to view Figure 4). The results are consistent with the notion that buyers want a bull that possesses some intramuscular fat but do not want one with too much; again with a likely emphasis on flavor and texture of the cooked meat product.
The 365-day weight is a productive trait that is associated with the end test weight adjusted to 365 days of age and for the age of the dam. The results associated with the implicit price of 365-day weight, at the mean sale price, are revealed in figure 5 (click here to view Figure 5). Results indicate that the greater the 365-day weight, the less a buyer is willing to spend on an additional pound of weight. This represents the diminishing return to this productive trait as more of it is supplied in a single animal.
The productive trait of average daily gain is based on the daily weight gain the bull had during the 125-day test. It allows a buyer to identify a bull that could pass on traits that would result in faster growing offspring. The estimated implicit price of average daily gain is illustrated in figure 6 (click here to view Figure 6). The results on average daily gain demonstrate the importance of a hedonic pricing approach. Notice that the value of a marginal improvement in average daily gain declines as the bull’s average daily gain increases. This is because the bull represents a bundle of traits that trade off with each other to establish value. As the average daily gain increases, it reaches a point where an improvement in some other characteristic generates more net value to the producer instigating a decline in his/her willingness to pay for more improvement. Thus, buyers would be willing to pay more for an additional pound per day if the bull were slow grower.
The results of the implicit price of the birth weight variable at the mean sale price, shown in figure 7 (click here to view Figure 7), are interesting because they reveal that buyers prefer a smaller birth weight. The smaller birth weight is desired due to its association with calving ease. However, a buyer does not want a calf that is so light that its potential to survive is jeopardized so we see in figure 7 that the discount for birth weight increases for lighter birth weight bulls.
The results on the implicit price of Angus genetics suggest that producers value a bull with Angus genetics more than one that is of different breeding. Figure 8 (click here to view Figure 8) shows a graph of the implicit price of Angus genetics for different base bull prices. As the graph shows, the more a buyer is paying for a bull, the more they would be willing to pay for the bull to be of Angus genetics. This could be an artifact of the Certified Angus Beef programs and also may represent a propensity for those with high willingness to pay for bulls to prefer Angus for a variety of personal reasons. A linear relationship for Angus genetics exists because the presence of Angus genetics does not change at a scale rate, but instead the bull is either has Angus genetics or it doesn’t. Traits such as ribeye area have a curvilinear relationship due to the differences in size of ribeye areas the bulls possessed.
Implications for Cattle Producers
The estimated implicit prices provide an incentive for producers of bulls to focus on improving the genetic makeup of their bulls that they offer for sale. A bull producer with an estimate of his or her marginal cost for producing a unit increase of a bull trait can compare this to the implicit price for that trait for bulls of the type that they produce. Successive comparisons across traits will lead to a strategy for the bull producer of allocating scarce resources to those traits where the marginal revenue for an attribute (its implicit price) most greatly exceeds the marginal cost of making the improvement.
Both the buyers and the sellers of the bulls can use the information provided to improve the genetic base of the cattle being produced. By purchasing bulls that possess a specified trait, cattle producers will see the improvement made in the area of that trait over time in their offspring. Bull producers can use the information to determine what traits would be beneficial to focus on improving in order to produce higher valued bulls.
Lemenager, Ronald. Personal interview. 12 Oct. 2005.
United States Department of Agriculture/Economic Research Service, Food Availability Spreadsheets: Beef, Veal, Pork, Lamb and Mutton, and Total Red Meats. Internet Site: http://www.ers.usda.gov/Data/FoodConsumption/FoodAvailSpreadsheets.htm (Accessed February 4, 2006).
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