Inside every good bull is a pen full of bulls, steers and heifers trying to get out. Some of these will be as good as their sire. Some will be better. Some will be worse. Observation of a bull tells little about how much genetic superiority he can pass on to his sons and daughters. Measurements are needed. Identifying the superior offspring – the bulls that have the capacity to produce better offspring  is a science.
Identifying a bull as having the genetic capacity to pass on to offspring potential for high production, good reproduction and valuable carcase traits raises important question: What is it worth to a particular farm system to introduce genetic material able to deliver increased quantities and quality of beef production, improved reproduction, or better carcase traits?
The worth of superior genetics to a farm system is estimated by identifying the likely profit of a system with and without the superior genetics. The value of an extra unit of Estimated Breeding Value (EBV) of a trait introduced into a farm system is the extra income that results minus extra costs that are incurred in the system, including consideration of extra risk. The worth of superior genetics can only be known on a system by system basis. This comes down to a farmer by farmer basis. Ultimately it is the expected extra profit from the change, and the persons’ view of this expected change in profit in light of the change in risk, that matters.
In practice, proxy methods of analysis usually have to be used to estimate how much extra profit might be associated with introducing improved genetic potential of animals into a system. For example, important traits might be combined into a dollar index, using representative figures for outputs and costs of production associated with single unit changes in the levels of each trait. A dollar index such as BreedObject $Index can rank a bull with particular EBVs for traits in terms of its potential to add profit to a farm system. Potential buyers can use their own expected costs and returns in constructing such an index to rank alternative bulls for their system.
The Angus Society of Australia estimated the relative value of an extra unit of each trait (ASA 2001). An extra unit of marbling score for Jap B3 Index animals was worth $21.60. An extra unit of sale liveweight had a direct benefit of $13.60. In further analysis taking account of subsequent benefits from future generations as well (i.e. direct and indirect benefits), the net benefit of an extra unit of marbling score in the JapB3 Index in 2001 was estimated to be worth a net $50 per marble score across the supply chain (Parnell 2004).
Another way to estimate the value of a trait is compare two bulls that have a unit of EBV difference in a trait such as the EBV for IMF%, and calculate how much extra return would result from the expression of this trait by the two bulls, with all costs the same. Parnell did this in a recent paper (Parnell 2004). With assumptions about number of offspring, distribution of the range of IMF% of offspring within a marble score, progeny carcass weight, average weaning rate, replacements required, price premiums per kilogram for additional marbling scores, and discount rate for benefits from gains from future generations, Parnell estimated that the IMF% of a superior bull could contribute extra returns of $3100 more than an inferior bull. This comprised $1850 in direct (first generation) and $1250 in indirect (subsequent generation) extra returns.
Another approach to figuring out how much an extra unit of a trait might be worth is to look closely at the cheques buyers of bulls write to buy bulls and the different characteristics of the bulls that earn different prices. With this method, objective evidence is used and analysed using statistical analysis: what did buyers pay and what was it for? In the following is reported the results of a statistical analysis of bull sale data of the annual sale of a large Australian beef genetics company, for the years 199899, 200102, 200304.
The sale results of three annual bull sales of a leading Angus genetic company were analysed using econometric and statistical techniques. The dollar figure associated with a significant variable indicates how much extra could be expected to be received for a bull in the sale if all other traits were held constant and one extra unit of EBV of this trait was supplied with the bull.
IMF 
$1356** 
MCW 
$140** 
Milk 
$215** 
600 day wt 
$285** 
Birth Wt 
$886** 
Adjusted R squared (proportion of total variation in the prices of bulls sold that is explained by the model) 
61% 
** significant variables at 5%
IMF 
$1522** 
EMA 
$368** 
600 day Wt 
$188** 
Birth Wt 
$342** 
Adjusted R squared (proportion of total variation in the prices of bulls sold that is explained by the model) 
55% 
** Significant variables at 5%
IMF 
$1830** 
600 day Wt 
$125** 
Birth Wt 
$402** 
Adjusted R squared (proportion of total variation in the prices of bulls sold that is explained by the model) 
42% 
** Significant variables at 5%
For each of the three annual bulls sales analysed, for EBV’s for a small number of traits. 61%, 55% and 42% respectively of the variation in prices paid for bulls was explained. Around half of the variation in prices paid for bulls was caused by factors other than differences in EBV’s. The EBV traits 600 day, IMF% and birth weight were the traits that mattered in each of the three bull sales and caused buyers to pay more or less for bulls according to the EBVs of these characteristics.
The traits that shown to affect the price paid for a bull were also correlated with other traits, to varying degrees. For example, 600 day weight was highly correlated with 200 and 400 day weight. Thus the conclusion that 600 day weight EBV significantly influenced the price paid for a bull also holds, to the extent they are correlated, for 200 and 400 day weight. Similarly birth weight was correlated with calving ease, and IMF% was correlated with other carcass characteristics.
The results indicate that an extra unit of EBV for 600 day weight (and by implication to some extent 200 day and 400 day weight) was worth $285, $188, and $125 respectively for the three lots of sale bulls sold in 199899, 20012, 20034. An extra unit of EBV for IMF%, and to some extent correlated traits, was worth $1356, $1522 and $1830 respectively. One less unit of EBV for birth weight, and to some extent the correlated traits, was worth $886, $342 and $402 respectively. Alternatively, one more unit of EBV for birth weight would reduce the prices of bulls by these amounts.
The results can be interpreted to indicate the magnitude of tradeoffs between an extra unit of say EBV for IMF% or carcass traits and an extra unit of EBV of 600 day weight or growth rate. For example, over the period 19982004 an extra unit of IMF% EBV in a bull would have been worth around $1500 and an extra unit of 600 Day weight EBV would have been worth around $200. If the future was to be similar to the past, then gaining an extra unit of IMF% in a bull would be expected to be equivalent to gaining an extra 7.5 extra units of 600 day weight, in terms of effect on expected bull sale price.
In the 199899 sale, mature cow weight and milk EBV’s were also important in buyers bids. In 200202, Eye Muscle Area was important, along with 600 Day, BW and IMF%. In 200303, only 600 day, IMF% and BW significantly influenced buyers bids. Remember, when interpreting this result, the EBV information explained, around half of the variation in prices paid for bulls at these sales was caused by ‘other’ factors that I do not know[1] about and that are not included in the statistical analysis.
In the standard or ‘representative’ Japanese B3 Breedobject $index of the Angus Society, in a 2001 analysis, IMF% contributed 17 per cent of the emphasis on EBVs. An extra unit of marbling score was worth $21.60 (ASA 2001). The 600 Day EBV contributed 24 per cent of the total emphasis and an extra unit of sale liveweight was worth $13.60 in direct terms. The relative emphasis of birth weight was estimated to be 3 per cent, and an extra unit of direct calving ease was worth $7.70.
The results of the analysis of the bull sale data suggest the relationships between the value of an extra unit of an EBV of a trait, or the relative importance, was as follows:
Ratio of IMF%:600 day weight was $1356:$285 in 199899
Ratio of IMF%:600 day weight was $1522:188 in 20012002
Ratio of IMF%:600 day weight was $1830:$125 in 20032004
Ratio of BW:600 day weight was $886:$285 in 199899
Ratio of BW:600 day weight was $342:$188 in 199899
Ratio of BW:600 day weight was $402:$125 in 199899
From these relationships between the worth of an extra unit of EBV in a bull, the conclusion is that over the course of the three sales from 19982004, IMF% and correlated carcass traits increased in emphasis relative to extra growth rate, from a ratio of 4.78 to 8 to 14.65. At the same time the emphasis placed on reduced birth weight and related reproduction traits relative to growth rate has ranged from ratios of 3 to 2 to 3 over the three sales.
These results are at odds with the ‘percentage emphasis’ figures of the ASA (2001) which suggest the percentage emphasis and relative economic value of IMF% and birth weight, when compared to growth rate, are less important than growth rate. These results are also at odds with the ASA ‘relative economic values’ of different traits. Why the apparent difference? The most likely explanation is that the ratios of emphases calculated for the 3 bulls sales are for a population of bulls in which the range of variation of EBVs for traits such as IMF%, BW, 600 day wt. or $Index is much less than is the case for range of the same traits found in the population of bulls included in the ASA analysis (Parnell pers. comm.). It may be also that the ASA figures are for the average contribution of a trait to the total value of an offspring. The bull sale results reported in this paper are for an extra unit of a trait in a bull, not average value of the contribution of a trait to the total value of the bull.
An economic interpretation of the value of an extra unit of EBV of a trait would start with the notion that the value of an asset is the capitalized value of the net contribution the asset makes to total profit over the life of the asset. So a 10 year bond that is expected to return $100 per annum for 10 years is worth $1000 at the start of the 10 years if the rate of return the buyer requires is 10% p.a. i.e. buyer pays $1000, earns $100 per year and gets 10% return p.a. and gets $1000 back at the end of the 10 years. Or a piece of land that promises a net return of $100 p.a. is worth $1000 to a buyer who wants 10% return. This is called the income capitalization approach, $100/0.1=$1000.
The same logic applies to valuing the characteristics of a bull. If a an extra unit of a trait is worth $200, and the trait has no salvage value (though the bull does), and the buyer wants 10% on return capital from their investment in that trait, and the trait has a direct life of 4 years, then this implies (all dollars in real terms):
Year 
0 
1 
2 
3 
4 
Net income 
63 
63 
63 
63 

Capital investment 
200 

NPV=0, discount rate =10% real 

Internal rate of return is 10% real 
The equivalent interpretation is if $200 was borrowed as an amortized loan for 4 years at 10% p.a. interest, the annuity that will repay the principal and pay the interest is $63.
In this case the $200 investment in the trait with no salvage value (saying here that the trait has no salvage value, though the bull does) and a subsequent 4 year life that earns a net $63/year will cover the depreciation cost of the capital invested (recover the capital) and earn 10% real return on capital. The $63 net gain would have to come from an improvement of half a unit of the trait, as the bull provides half the genetic material.
If a buyer paid $1500 for an extra unit of IMF%, the extra annual direct net benefit from half a unit of the trait would need to be:
Year 
0 
1 
2 
3 
4 
Net income 
473 
473 
473 
473 

Capital investment 
1500 

Net Present Value at 10% real discount rate = 0 

Internal Rate of Return = 10% real 
In the Parnell (2004) analysis, this approach is used to compare the value of 2 bulls that differ from IMF% EBV 0.2 to IMF% EBV 0.8. Direct and indirect benefits are counted. The indirect benefits over 20 years were equivalent to about 2/5 of the direct benefits over 4 years, mating 35 cows per year, using a 7% discount rate (required return on capital).
The present value of $1500 for an extra unit of IMF% EBV might be split 60% for direct benefits and 40% for indirect benefits. That is, $900 is the value of the direct benefits from an extra unit of IMF% EBV. In this case the direct benefits required would be:
Year 
0 
1 
2 
3 
4 
Net income 
284 
284 
284 
284 

Capital investment in direct benefits 
900 

IRR = 10% 
What gains could be expected from the extra unit of genetic potential purchased? To earn 10 per cent on the investment of $900 in an extra unit of EBV potential, $284 per year for 4 years in extra net income would have to result directly.
If $900 is paid for direct extra benefits of an extra unit of EBV of IMF%, the question is: how much extra might I get back? As shown above, we need to make an extra $284 net income from direct benefits per year for 4 years to earn 10% on the extra investment and recover the cost of purchasing the extra direct genetic potential. This is net of all extra costs incurred to express the genetic potential. With 25 offspring sold a year (35 matings, 90% weaning, 31 weaners, 7 heifers retained, 25 progeny sold), $284/25=$11.36 extra income required per animal sold. This would have to come from half an extra expression of IMF%. This is an average across the animals. In practice some progeny will perform better than average and some worse.
Suppose the $1500 paid for an extra IMF% EBV unit was for a sire whose offspring was headed for the Jap B3 Index. This could well be the case as many bulls in the sales analysed were high Jap B3 Index bulls. In this case, the bull buyer is paying $1500 for an extra unit of IMF% EBV, and needs to get a net benefit of around $11/offspring sold. A bull with one unit of IMF% EBV superiority might produce offspring that on average have half a percent more intramuscular fat. Half a percent IMF might equate to half a marble score, from say MS3 to 3.5 (Parnell 2004).
The Angus Society of Australia (2001) report estimates of the net present value of an extra unit of marble score across the supply chain as being around $50 for JapB3 Index and $23 for CAAB Index, the majority, say 60%, of which would accrue to the farmer because of competition through the chain (Fisher 1981). So half an extra unit of MS might be worth around $15 to the farmer, i.e. $50*0.6*0.5.
Therefore, an extra unit of IMF% EBV could amount to an extra half a marble score, worth around a net $15 using the ASA (2001) estimate of the NPV of an extra MS of Jap B3 Index being worth $50 through the chain.
The conclusion would be that the buyer of the bull who paid $1500 for an extra unit of IMF% EBV needs to get around $11 extra net return per head of offspring. This would justify paying the $1500 for the bull with the extra unit of IMF% EBV and earn 10% on the investment. Around $15 net (from half a MS) could be available to the buyer. The buyer might have it about right.
Using Parnell’s (2004) example and assumptions about MS 2 carcasses bringing an extra 40c/kg premium and an extra MS above this bringing a further 20c/kg premium, if the extra unit of IMF% EBV expressed amounted to half a marble score on average over all the offspring, and the gain was from a MS of 3 and above, then this would amount to an extra gross income per year per carcass of 345kg *0.5MS*$0.2 = $34.50.
In this example there is $34 extra gross income per head available for the animal with half a marble score better carcass. The producer needs to net $11 extra to justify the investment in the superior IMF% bull. There are two ways to think about this issue:
Suppose a pen of steers were fed for a given cost. The carcasses of the progeny from the sire who cost $1500 more (one unit higher IMF% EBV) would bring in $34 more gross return than the progeny of a sire with one unit less IMF% EBV potential. The feed cost per head for the two animals could be about the same. If so, the bull buyer will earn more than 10% return on the investment in higher IMF% potential.
Alternatively, requiring $11 extra net return per animal sold, and with potentially $34 extra gross return available, leaves the key question: ‘How much will it cost to produce animals with this extra half a MS and 0.5% of extra IMF%?’. There is $23 available for extra feed and any other costs to increase carcass MS from 3 to 3.5. The likely amount of feed required to add half a marble score to a MS 3 carcass is not known. If 200 kg DM extra feed added half a marble score to a MS 3 carcass, the buyer of the higher IMF% potential bull would get the required 10% return on extra capital invested.
In three sales of Angus bulls from one genetics company 199899, 20012, 20034 the EBV traits that were significant – had a definite (not chance) effect on prices buyers paid  were 600 Day (and by association 400 and 200 Day weight), IMF% and birth weight.
The results indicate that an extra unit of EBV for 600 day weight (and by implication to some extent 200 day and 400 day weight) was worth $285, $188, and $125 respectively for the sale bulls analysed. An extra unit of EBV for IMF%, and to some extent correlated traits, was worth $1356, $1522 and $1830 respectively. One less unit of EBV for birth weight, and to some extent the correlated traits, was worth $886, $342 and $402 respectively. Alternatively, one more unit of EBV for birth weight would reduce the prices of bulls by these amounts.
The emphasis placed by bull buyers at these sales on extra IMF% and correlated carcass traits have grown in relative to the emphasis placed on extra growth rate, from a ratio of 4.78 to 8 to 14.65. At the same time the emphasis placed by bull buyers on reduced birth weight and related reproduction traits relative to growth rate has ranged from ratios of 3 to 2 to 3 over the three sales.
If a bull buyer paid an extra $1500 for an extra unit of IMF% EBV, and wanted to earn 10% return on the extra capital invested, then he or she would need to get an extra $11 net return from the offspring of the bull with the extra unit of IMF % EBV potential.
Angus Society of Australia, (2001), http:www.angusaustralia.com.au
Parnell, P.F., (2004), Industry application of marbling genetics: a brief review, Australian Journal of Experimental Agriculture, 44, 697703.
[1] I can speculate sensibly about what some of these ‘other’ factors might have been, such as structural soundness or conformation.