Financial Feasibility of Embryo Transfer

Embryo transfer technology has been used as a laboratory technique since the late 1800’s, but it was not used commercially until recently. The advent of exotic breeds of cattle in the 1970’s provided the economic incentives for application of the technology for commercial purposes. Previous economic studies have indicated that the cost per calf may be as high as $2,414 or as low as $200 as reported in a popular source. Van Vleck has stated that increased milk production will not pay for the extra costs of embryo transfer. This conclusion was based on the net present value of the additional milk after taking into consideration the genetic potential of the dam and sire. Another study estimated that for milk receipts alone to pay for the added cost, the cost of embryo transfer would have to drop to below $200 per pregnancy. 
Predictions for the future of embryo transfer range from optimistic to the cautious. The cautious note that the basic motivation for present use of the technology is not increased milk production, but tax incentive exploitation by livestock breeders and investors. None of these previous studies have presented the financial feasibility along with the tax benefits. 
Tax incentives from embryo transfer are very attractive and often entice investors in the high marginal tax brackets into the industry. Investors as well as livestock breeders can take advantage of investment tax credit, depreciation, capital gains and can expense the costs of embryo transfer under the Internal Revenue Tax Codes. 
The objectives of this paper are to: determine the feasibility of embryo transfer including tax benefits and to determine by sensitivity analysis some conditions under which it becomes feasible.


Introduction
Embryo transfer technology has been used as a laboratory technique since the late 1800's, but it was not used commercially until recently. The advent of exotic breeds of cattle in the 1970's provided the economic incentives for application of the technology for commercial purposes (1).
Previous economic studies have indicated that the cost per calf may be as high as $2,414(1) or as low as $200 as reported in a popular source (2). Van Vleck has stated that increased milk production will not pay for the extra costs of embryo transfer (3). This conclusion was based on the net present value of the additional milk after taking into consideration the genetic potential of the dam and sire. Another study estimated that for milk receipts alone to pay for the added cost, the cost of embryo transfer would have to drop to below $200 per pregnancy (4).
Predictions for the future of embryo transfer range from optimistic (5) to the cautious (1). The cautious note that the basic motivation for present use of the technology is not increased milk production, but tax incentive exploitation by livestock breeders and investors. None of these previous studies have presented the financial feasibility along with the tax benefits.
Tax incentives from embryo transfer are very attractive and often entice investors in the high marginal tax brackets into the industry. Investors as well as livestock breeders can take advantage of investment tax credit, depreciation, capital gains and can expense the costs of embryo transfer under the Internal Revenue Tax Codes (6).
The objectives of this paper are to: (1) determine the feasi bility of embryo transfer including tax benefits and (2) to determine by sensitivity analysis some conditions under which it becomes feasible.

Method
On-farm embryo transfer is considered in this article. The analysis is based on the marginal (incremental) costs of embryo transfer from donor to recipients over costs resulting from artificial insemination by a superior sire where the cow carries her own embryo. The on-farm technique was selected because the technology is available and it is being done successfully. Since it is both the low-cost and low-risk method it sets the base standard for comparison. If this method is not economically viable the use of higher cost alternatives would not be feasible.
The model was developed on a CALC RESULT spreadsheet using a Commodore 8096 microcomputer. All of the parameters in the model were included as variables so they could be changed for the sensitivity analyses. Sensitivity analyses were done by changing key variables and determining the impact on the cash flow and net present values.
The net present value is defined as where: El* = The net cash flow after taxes r = Cost of capital or target return on investment for the farm or firm N = Number of years Included in the B; s are all of the cash inflows and outflows including the tax incentive indentified above. If the NPV > 0 then the project has a return greater than the target return or acceptable return on investment and the project is feasible. When the NPV < 0 then the project has an unsatisfactory return. A NPV = 0 indicates that the return is exactly equal to the cost of capital.

A Iternatives Evaluated
The two alternatives considered were (1) using the top cows in a dairyman's own herd or (2) purchasing top quality cows and using them as donors. Embryo transfer technology would potentially allow a dairyman to select daughters from the top 10 percent of the herd as replacements rather than the top 90 percent, thus improving the genetic potential of the herd more rapidly (3).

Assumptions
Assumptions for the alternatives where donors from the top ten percent of the herd would be used are shown in Table  1. The model is robust enough so that any of these para meters can be changed and the impact determined. Corresponding assumptions for the buy scenario are also shown in this table with only the changes indicated.
Other assumptions are: 1. All bull calves are sold. 2. The model is defined to include all flushes that are completed within one year. If the process is profitable for this period, it will be profitable for repeated replications. 3. For the buy scenario, it was assumed that the animal was sold after one year even though this may not be the usual nor expected procedure. Necessary adjustments were made to the cash flow after considering the tax implications. It was assumed that the herd has a 365 day rolling average of 17,000 lbs of milk. The donors would have had four lactations with mature equivalents significantly above the herd average. Milk production of the daughters of these donor cows and their superior mates would be expected to be above the average of the recipients. The extent of the difference will depend on the selection differential. It was assumed that the major share of the costs of embryo transfer will be paid for by the sale of one of the heifers and a slight increase in value of male calves. The increase in milk produc tion from the donor's offspring is partially offset by loss in donor milk production and extra feed costs resulting from delaying recipients. Specific costs of stimulating and collecting embryos are shown in Table 1.
Implantable embryos obtainable from cows which will successfully superovulate vary from four to five as reported by Donaldson (7). The delay in recipient milk production is an average. Those recipients who conceive will not be delayed usually. The recipients who fail to conceive will be delayed longer than those who are extra and are not given embryos. The percentage of heifer calves entering the milking herd is determined by calf survival, heifer infertility, and abortions.

Base Case for Owned Cow
The base case for an owned cow is unfavorable using the assumptions presented in Table 1. The net present value of $340 indicates that the return is less than the seven percent after tax target return on investment. This return would approximate current money market rates and is very conservative since it doesn't provide a return for risk. A higher return would be required to compensate for more risk and it would make the results less attractive than shown here. (Table 2).
During Year 0, the embryo transfer costs make the net after tax cash flow negative, but there are tax savings which reduce the size of the outflow. The cash flow is positive during the second year due to the sale of the heifer and bull calves. In Year 3, milk receipts from the cows originating as transferred embryos start and the reduction of milk receipts lost by delaying the freshening date of recipients is recoverd. However, the inflows are not large enough to offset the up front costs of the embryo transfer. The additional costs incurred with the transfer calf over an artificial insemination replacement heifer is $452 before and $403 after tax considerations.

Base Case fo r Purchased Cow
The scenario where a top quality donor is purchased is shown in Table 3. If a donor is purchased for $15,000 and then could be sold for $13,000 at the end of one year and flushed twice, the return is unsatisfactory when the sales price for a heifer calf is $2,000. For this case, the NPV is -$2,725. The additional before-tax cost per calf is $677 and the after-tax cost is $497.
It is possible that the bull calves from a cow of this value could be sold for higher prices than assumed. The cow could also be flushed more than twice per year which would make more offspring available for sale to offset the costs. Table 4 shows the necessary value of the heifer calf sold at different values of bull calves to obtain the target return.

Sensitivity Analysis
Sensitivity analysis was done to determ ine the relationship between the mature equivalent production differential and the price of bull and heifer calves which would be necessary to obtain a satisfactory after-tax return on investment (Table 4). The production differential is the additional milk which would be expected from the offspring of the donor as compared to the recipient's calf. All other assumptions for the base case were unchanged for this analysis.
With no change in the production differential, the additional value of the heifer calf, which is sold, over a heifer calf from a recipient, must be $2,742 for the owned cow scenario and $6,455 for the purchased cow scenario to meet return on investment guidelines. These values could also be affected by changes in the other technical or economic assumptions.
The impact of the production differential is not great as suggested by earlier studies. In general, the value of increasing the production differential from 0 to 6,000 pounds is approximately $442 or $7.36 per cwt. for both scenarios for each lactation per animal. If Van Vleck is correct in that the expected genetic improvement over artificial insemination is only 76 pounds per year (3), then the value is only minimal for the three lactations assumed. This increase is hardly enough to justify the costs even after considering tax benefits which were excluded in previous studies. This reemphasizes the necessity of obtaining attractive heifer and bull prices to offset the embryo transfer costs.
As the sales price for bull calves increases from $100 to $1,000, a corresponding reduction in the necessary price for heifers occurs. The impact of the decrease is substantial since all of the bull calves are assumed to be sold. If the potential of selling bull calves for high values exists, it has a substan tial favorable impact on the return.
No attempt has been made in this study to quantify the impact of the increased value in quality of heifers resulting from transferred embryos. Very likely their added value over replacement heifers coming from a grade recipient could offset some of the costs of embryo transfer.

Upside Potential
Upside potential can be examined in a number of ways. For example, one could assume that higher prices could be obtained from animal sales. If this would happen, the NPV would increase correspondingly. However, an upside on technical assumptions was examined rather than economic assumptions.
An upside could occur if a larger number of embryos were obtained on a given flush and more heifer calves were available for sale. This information is shown in Table 5. If only one heifer is sold the price for a heifer necessary to obtain a substantial return increases as the number of embryos increases. This is because the milk production 184 THE BOVINE PRACTITIONER -NO. 19   The five most costly words in a cattlemans vocabulary: V ou know isolation pens and routine 1 injections are no guarantees against an outbreak of shipping fever. T hats why, at the first sign of respiratory distress, even the best-managed feedlots face a critical decision. Should the infection be aggressively treated now? Or, can your client gamble that antibiotic therapy may do the job later?
Some gamble! If he 'wins'he still loses. Because even if the animal survives the waitand-see period, postponing treatment often means a substantial delay in returning to feed. And that translates into real economic loss.
warning. Do not treat for more than 7 days. Milk from treated cows must not be used for food during treatment, or for 48 hours (4 milkings) after the last treatment. Treated animals must not be slaughtered for food during treatment or for 144 hours (6 days) after the last treatment.     aHeifer price necessary to obtain 7% after-tax return on investment. potential may offset this downside risk. If someone is not risk averse, the gamble may be a good one if the assumptions for the base case are realistic. If offspring can be sold at attractive prices, a breeder or investor stands to gain more than he could lose even with a rather dismal situation.

Summary
It is interesting to contemplate the future of embryo transfer in the dairy industry since the increase in milk production and tax advantages will not offset the costs. Possibilities which could favorably affect the utilization of these techniques are (1) technological improvements, (2) increases in the value of milk or animals and (3) decreases in the costs of embryo transfer.
Technological advances which could be a stimulus to this technique include better herd management techniques, cryopreservation of embryos and estrus synchronization. Utilization of each of these could reduce the costs and increase the profitability of using embryo transfer on the farm. Cryopreservation is one technology that could have a favorable impact on the industry by eliminating the costs associated with synchronizing estrus in a large number of animals. Technological advances in the other areas could also have favorable impact on the cost structure and profitability.
Intangible benefits accruing from replacing grade heifers with registered heifers have not been examined in this model but would, of course, affect many dairymen in their decisions. The difference between sale value of registered heifers and grade heifers fluctuates but is an economic factor which could favorably influence practices involving embryo transfer.
The milk production differential is not large enough to offset the costs of embryo transfer at current milk prices. The current surplus of dairy products with the corresponding downward pressure on prices leaves little hope that milk prices will increase by an amount sufficient to make the technology attractive. It is only remotely possible that technology will advance far enough so that it will establish profitability based only on increased milk production.
The near term future of the industry will be based on the ability to sell high quality livestock at premium prices. Sales of high quality offspring will continue to provide the economic justification for the use of embryo transfer techno logy in the dairy industry. Even the most optimistic scenario based on technical assumptions is not feasible if premium prices cannot be obtained.
It is expected that breeders with top quality animals will continue to use this technique to increase the number of saleable offspring from their animals. It is highly unlikely that dairymen who can't sell high priced animals will use it on a widespread basis until the increase in milk production will pay for the costs and provide a satisfactory return on investment.