NET PRESENT VALUE SIRE SUMMARIES</head>

NET PRESENT VALUE SIRE SUMMARIES

DAIRY HERD IMPROVEMENT
1986

BLAKE, R.W., SHUMWAY, C.R., & TOMASZEWSKI, M.A.
VOLUME: NCDHIP HANDBOOK

Selection of artificial insemination (AI) sires is an investment in
economic returns from genetic improvements. However, investment in
genetic improvement does not earn income generally until
descendants lactate. Because of this time lag, future net returns
need to be standardized by a multiplicative discounting factor
containing the appropriate interest (or discount rate) and time
when returns are received. The time horizon of genetic investment
includes discounted net incomes that are expected from one or more
generations of descendants of selected parents. The net present
value of returns from later descendants is smaller than from first
generation descendants (daughters) because of the diminishing
genetic relationship of successive generations with originally
selected ancestors and because net incomes from each successive
generation are more heavily discounted. Net present value is an
economic index that will always lead to correct investment
recommendations for producers seeking to maximize profits.

What Is the Net Present Value Sire Summary?

The Net Present Value (PV$) Sire Summary Program was developed at
Texas A&M University to help dairy producers better manage
investment in genetic improvements. The PV$ criterion is a linear
index of net merit that considers Predicted Differences (PD) for
milk and fat and Predicted Difference for type score (PDT), the
price of semen and the discount rate (in other words, the cost of
money), to select most profitable AI sires under alternative
selection policies and herd management factors of conception rate
and planning horizon. Other assumptions include: average age at
first calving is 27 months; average cow herdlife is three
lactations; replacement females are born at the second calving of
their dams; feed costs are 45 percent of milk income and the
difference in PDT between an average bull and the top one-sixth of
AI bulls is as valuable as the corresponding difference in
Predicted Difference Dollars (PD$) when equal weights are placed on
PDT and PD$ in the selection policy.

Dairy producers, like stockbrokers, should evaluate the worth of a
bull relative to his semen price. Just like shares in some
first-class corporations, some bulls are overpriced. The PV$ of a
dairy sire is an optimal weighting of genetic, reproductive and
financial (economic) information to rank bulls by net profit (or
return on investment), expressed in today's dollars (or present
value), for a specified herd situation. Selection of AI sires by
the PV$ index is intended to help breeders increase profits by
keeping actual emphasis on different traits near to what they
intended.

The PV$ criterion ranks bulls by relative profitability. Negative
PV$ values indicate money losing genetic investments for the
specified selection policy, female conception rate and planning
horizon, assuming that it costs nothing to achieve zero genetic
gain. Most profitable AI sires are those with the largest PV$
values.

What Affects Profits From Genetic Improvement Programs?

The most profitable sires of future cows for one dairy farm are not
necessarily the most profitable ones for another farm with
different objectives and management characteristics. Consequently,
PV$ profit rankings of bulls differ between alternative farm
situations depending on:

1. Selection policy of relative emphasis on net incomes from milk
and type score.

2. Average herd conception rate (not of bulls) by age of female.

3. Number of generations of descendants of a bull considered in the
financial planning horizon.

4. Actual semen cost.

High-ranking bulls from one summary may not be attractive for herds
with different selection goals, conception rates or planning
horizons. Therefore, profit-maximizing programs of genetic
improvement depend on accurate specification of these variables and
semen cost for individual herds.

Selection Policy

Choose the PV$ summary corresponding most closely to your selection
policy. Examples of alternative selection emphasis based on sources
of net income are the 1:0 and 3:1 milk-to-type selection policies.
The 1:0 milk-to-type selection ranks bulls by net profit
considering only milk income over feed cost and semen cost. This
selection policy ignores type score. For the 3:1 milk-to-type
selection, sales of breeding stock or reduced cost of milk
production as a result of improved type are assumed to account for
about one-fourth of annual net income.

Female Conception Rate

More than one PV$ sire summary should be consulted to select the
highest profit bulls for a herd with a specified selection policy
and planning horizon because average conception rate differs by age
of breeding female (highest in heifers and lowest in old cows).
When conception rate is low, more semen is required to replace the
herd than when it is high.

Planning Horizon

The most profitable bulls ranked nearly the same regardless of
number of generations of descendants (such as daughters,
granddaughters, great-granddaughters) in the financial planning
horizon, except for the Holstein breed. PV$ values for the
one-generation planning horizon considers only net income from an
average daughter of a bull. PV$ for the infinite planning horizon
includes additional profits from genetic contributions to
descendants beyond daughters of a bull.

Appropriate planning horizons for individual producers depend on
the cost of the debt load relative to other costs of production.
Holstein dairy producers struggling financially with burdensome
interest payments will enhance their chances of economic survival
by choosing highest PV$ bulls under the one-generation (daughters
only) planning horizon. Those with small debt loads that seek to
maximize the longrun returns on their genetic investment program,
such as by dispersal or inheritance by a family member, should
choose highest-ranking sires under the infinite planning horizon.
Research has shown it is less costly to underestimate than to
overestimate the correct planning horizon.

Semen Cost

PV$ values will change when semen cost changes. Lower prices result
in higher PV$, and higher prices cause PV$ values to decrease.
Changes in PV$ can be re-estimated to determine new sire rankings.
PV$ decreases approximately $6 for every $1 increase in price per
unit of semen for each selection policy, female conception rate and
planning horizon. Conversely, PV$ increases $6 for every $1
decrease in price per unit of semen.

How Good Are the Highest PV$ Bulls?

An early concern about a profitability ranking of AI sires was that
it might endorse genetically mediocre bulls with cheap semen.
Holstein PV$ Sire Summaries corresponding to the January 1985 USDA
Sire Summary included 403 bulls for the 1:0 selection policy and
314 bulls (those with PDT's) for the 3:1 milk-to-type selection
policy. Average PD's for all bulls with PV$ were about 710 pounds
of milk, 83 PD$ and 53rd percentile for PD$ among bulls summarized
by USDA. Average PDT was +.58 points. Average retail prices per
unit of semen were about $12 and $13 for the 1:0 and 3:1 selection
policies, respectively.

Milk Only Selection Policy

Table 1 contains the 10 bulls with highest PV$ and averages to
compare the top 10, top 20 and all bulls for the 1:0 selection
policy, 50 percent female conception rate, and one-generation
planning horizon. The 20 most profitable bulls averaged 1,218
pounds PD milk, 137 PD$, 122 PV$ (the average for all 403 bulls was
37 PV$), and $9 per unit of semen. This group of bulls ranked at
the 94th percentile for PD$, which shows that the elite 5 percent
of bulls for profit are equally elite genetically for milk income.

Milk-to-Type Selection Policy

Table 2 contains the 10 bulls with highest PV$ and averages to
compare alternative groupings of bulls for the 3:1 selection
policy. The 20 most profitable bulls averaged 943 pounds PD milk,
122 PD$, 141 PV$ (the average of all 314 bulls with PDT's was 59
PV$), $11 per unit of semen and +1.12 PDT. Average PD$ for this
group of bulls ranked them at the 90th percentile for milk income,
which shows that the elite 6 percent of bulls for profit also were
in the top 10 percent genetically for milk income. They also were
in the top 23 percent (of 314 bulls in the PV$ Sire Summary)
genetically for type score. The 20 most profitable service sires
for either selection policy could be purchased with 15 to 25
percent smaller semen budgets than bulls of average profitability.

Dairy producers seldom use 20 bulls equally at the same time. For
producers who use corrective mating, secondary selection for type
traits (beyond the specified milk-to-type selection policy) from
among the highest profit bulls is recommended. For example, the 5
highest PDT bulls among the 20 most profitable ones for the 3:1
selection policy had average ranks at the 92nd percentile for type
score (+1.62 PDT) and the 69th percentile for milk income (97 PD$),
and semen price averaged $10 per unit (Table 2). Among these 20 top
profit bulls, the 5 bulls with highest PD$ were at the 97th
percentile for milk income (158 PD$) and 51st percentile for type
score (+.63 PDT), and semen price averaged $13 per unit (Table 2).

Use Confidence Intervals to Discriminate Between Bulls

Confidence intervals (CI) define the limits of accuracy of PV$
estimates, which vary with the Repeatabilities of Predicted
Differences for milk and type score. There is a 60 percent
likelihood that the true PV$ of a bull lies between PV$ minus the
60 percent CI and PV$ plus the 60 percent CI, and a 20 percent
chance that it lies above or below the limits of confidence.

The highest ranking Holstein bull for herds with a 3:1 selection
policy, 50 percent first service conception rate and one-generation
planning horizon was calculated to have a PV$ of $198. Associated
with this PV$ was a 60 percent chance that the true PV$ was
somewhere from $21 below ($198-$21 =$177) to $21 above ($198+ $21
= $219) our best estimate. Expressed another way, there was an 80
percent chance that the true PV$ was greater than, and a 20 percent
chance that it was less than, $177.

Consider two bulls under the 3:1 selection policy. Bull A has 150
PV$ with a 60 percent CI of plus or minus $17. Bull B has 120 PV$
with a 60 percent CI of plus or minus $12. The lower limit of the
60 percent confidence interval for Bull A is $150 $17= $133. The
upper limit of the confidence interval for Bull B is $120 + $12=
$132. Other things equal, Bull A is a better bet than Bull B
because the lower limit of confidence for his PV$ is greater than
the upper limit of confidence for the PV$ of Bull B. There is an 80
percent chance that true profit from Bull A will be greater than
$133, while the chance is only 20 percent that true profit from
Bull B will exceed $132. Consequently, Bull A is a lower risk than
Bull B.

Generally, confidence intervals of adjacent bulls overlap but
notable differences occur between groups of bulls. This underscores
an important point: sire evaluations accurately rank groups of
bulls and not individuals. The sire selection rule to follow is to
choose several of the highest ranking bulls was service sires.

How to Obtain PV$ Sire Summaries

Currently, publication of PV$ Sire Summaries occurs twice a year in
Dairy and Dairy Herd Management magazines. The summaries include
1:0 and 3:1 milk-to-type selection policies, 50 percent female
conception rate, and one-generation (Holstein only), and infinite
planning horizons. Alternative PV$ rankings by female conception
rate may be obtained by telecommunicating with the Direct Access to
Records by Telephone (DART) program of the Dairy Records Processing
Center (DRPC), Raleigh, North Carolina, or by contacting the state
Extension dairy specialist. The DART computer program enables
individual producers to specify actual semen prices in order to
compute PV$ of the most profitable bulls for any selection policy.
Like DART, HerdMate, the Texas A&M University microcomputer program
for individual cow matings, also calculates and prints PV$ Sire
Summaries.

Summary

The Net Present Value (PV$) Method of Evaluation is a proper
pairing of economic and genetic principles to assure that dairy
producers earn greatest returns from investments in alternative
selection programs and herd management situations. Producers can
achieve the highest profit genetic improvement programs by choosing
service sires with the highest PV$. The highest profit bulls for
individual farms are determined by specifying actual semen price,
selection policy, average conception rate for breeding females and
planning horizon (Holstein only).

When prices of semen differ from the retail prices used to
calculate PV$, the correct PV$ is obtained by adding or subtracting
$6 for each $1 change in price. A price decrease of $1 signifies a
$6 increase in PV$. A price increase of $1 signifies a $6 decrease
in PV$.

Customized PV$ sire selection information is obtained by
telecommunicating with DART at the Dairy Records Processing Center,
Raleigh, North Carolina, or by using HerdMate, the Net Present
Value (PV$) Sire Selection and Cow Mating Software Program.
Producers taking advantage of DART or HerdMate can obtain PV$
listings for individual herd situations by specifying semen price,
milk-to-type selection policies, conception rates by age of females
and (for Holstein breeders) one-generation or infinite financial
planning horizons. Others should contact their state Extension
dairy specialist.

TABLE 1. Summary of the 10 highest Net Present Value
(PV$) Holstein bulls for the 1:0 milk-to-type
selection policy, 50 percent female conception rate
and one-generation planning horizon for winter 1985,
and averages for all bulls and Elite groups of bulls.

Semen
NAABa +/-CI(b) PD$(c) PD cost
Sire code PV$ (60%) % PD$ milk PDT ($)
9H625 164 12 97 158 1,496 -0.59 6
3H1034 157 14 99 171 1,095 10
3H1205 139 15 96 156 1,108 10
29H4535 137 24 96 155 1,426 1.31 10
29H3577 134 16 93 134 1,572 -0.51 6
3H922 129 12 98 167 1,131 -1.83 14
29H3646 125 19 98 168 1,496 0.33 15
29H5100 125 22 99 182 1,376 18
7H1053 116 16 86 115 1,087 -0.72 5
9H176 116 3 90 120 888 -0.59 6
Averages
Top 10 134 96 153 1,270 10
Top 20 122 94 137 1,218 9
All bulls 37 53 83 710 12

a National Assocation of Animal Breeders.
b The amount to add or subtract from PV$ to define limits of the 60
percent confidence interval in PV$.
c Percentile rank in PD$.

TABLE 2. Summary of the 10 highest Net Present
Value (PV$) Holstein bulls for the 5:1 milk-to-type
selection policy, 50 percent female conception rate
and one-generation planning horizon for winter
1985, and averages for all bulls and Elite groups
of bulls.

Semen
NAAB(a) +/-CI(b) PD$(c) PD cost
Sire code PV$ (60%) % PD$ milk PDT ($)
29H4535 198 21 96 155 1,426 1.31 10
7H1503 150 17 88 118 1,170 1.29 10
7H1038 149 12 77 105 530 1.36 8
7H1129 147 18 90 120 967 1.16 10
3H1068 143 8 66 94 547 1.54 8
11H2139 140 12 98 164 747 1.08 20
29H3646 140 17 98 168 1,496 0.33 15
3H1012 140 8 95 143 687 1.02 15
7H1516 138 21 76 104 990 1.16 8
7H2777 138 13 94 138 1,809 0.74 12
Averages
Top 10 148 93 131 1,037 1.10 12
Top 20 141 90 122 943 1.12
All bulls 59 52 82 713 0.58 13
From Top 20
Top 5 for
PD$ 151 97 158 1,170 0.63 13
Top 5 for
PDT 138 69 97 606 1.62 10

a National Association of Animal Breeders.
b The amount to add or subtract from PV$ to define
limits of the 60 percent confidence interval in PV$.
c Percentile rank in PD$.

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%f TITLE;NET PRESENT VALUE SIRE SUMMARIES
%f COLLECTION;DAIRY HERD IMPROVEMENT
%f ORIGIN;Texas
%f DATE_INCLUDED;June 1992