Thursday, January 24, 2013

Why large animal veterinarians need to know something about economics

On many veterinary faculties, the students receive some teaching in economics. Many times this is provided by an agricultural economist who does not speak the language of the veterinarians very well. Students are taught production economics (the basics of it) and the link between their veterinary profession and the economics is far away. Moreover, economics is not seen as a basic need for veterinarians, especially now more and more veterinarians are moving into companion medicine instead of large animal medicine. The rationale for the economics in the veterinary curriculum was lying in the fact that veterinarians should need a bit about the economics of their customers: the farmers. That is not needed when going for companion animal medicine.

When I started to teach economics at the Faculty of Veterinary Medicine of Utrecht University (hired in from Wageningen) in 2001, I could teach my own course. The course was a combination of production economics as well as animal health economics. And through the time (we are now two curriculum changes further), the amount of economics has decreased. First my course was combined (and reduced) with another course into Veterinary Herd Health Management and now it is part of the course Epidemiology and Breeding. Besides that basic work there are a few lectures and working groups in the Master phase of the curriculum.

When I write this, I am travelling back from Bangkok to the Netherlands. I have given two invited presentations during the ICVS (International Conference for Veterinary Science), held for the 38th time and organized by the Thai Veterinary Medical Association. It was great to be hosted by a former PhD of our Utrecht group, Chaidate Inchaisri, who is doing interesting disease decision support work now in Thailand at the Chulalongkorn University.

The title of my presentations were Econonomic side of veterinary work. The first presentation gave some economic backgrounds and reasons that economics are important in the veterinary field. The second presentation gave applications of economic calculations on the individual animal, herd and regional level and was meant to make the audience think about possible applications in their own field of work.

I was told on forehand that economics is not seen as being important by many Thai veterinarians and I was programmed parallel with two presentations entitled: New era of antibiotic use. I lost the competition :-). My room was far less filled than the other room. I do understand veterinarians that choose to learn more about treatments, because that comes much closer to the day to day work they are doing. But still I also believe that some understanding of economics is essential for veterinarians working in the field of large animal medicine. Why? I’ll tell you.

There are two reasons:
1.   Veterinarians do give advices to farmers on treatments, disease prevention, etc. Veterinarians are aiming at maximum animal health and do believe that their advice that their advice is the best for the farmer. And I do believe that farmers should be able to trust the veterinarians for that as well. However, the goal of a farmer is not to maximize animal health (at least in most cases not). Farmers also want to make a living, have constraints in time and money and the advice should take that into account (optimizing vs maximizing). Therefore some knowledge about the costs of their advice, vs the benefits in terms of improved animal health, but also improved income of the farmer is thus important.
2.   Veterinarians need to sell their products. For drugs that is easy: in most countries, vets are the only persons that are allowed to sell drugs. There is a tendency, however, that more and more of the income of farmers have to be earned by selling advices, for instance through veterinary herd health and management programs. In order to sell these “products”, the economic consequences (benefits) of these products need to be known. It has been shown that for Dutch farmers economic reasons are an important (but not only) reason for farmers to participate in a veterinary herd health and management program. For farmers not participating, economics were a very important reason not to participate.

Now, should veterinarians know everything about economics? No of course not. I think vets should be able to reason economically and to be able to critically interpret scientific and applied work from people such as myself so that they can support farmers and market their products.

Tuesday, January 8, 2013

Economics of automatic milking

In the end of November I was invited by DeLaval (Tumba, Sweden) to give a webinar (seminar which was broadcasted over their internal network so that employees from over the world could join) on two topics. The first topic was economics of production diseases and the second topic was on economics of automatic milking. The first presentation was quite similar to the presentation I gave at the World Buiatrics Conference in Lisbon, Portugal (slides can be found here). But the second presentation (slides can be found here) had quite some new research results which I will talk a bit further about in this blog.

I felt in the lion's den because I have been talking and publishing about the economic effects of automatic milking which are not always positive. As you know, automatic milking has become mainstream nowadays. Since the time of the first serious publications on automatic milking the economics of automatic milking has been of interest. These first publications were in the book called: Prospects for Automatic Milking: proceedings of the International Symposium on Prospects for Automatic Milking, a symposium organized by the old IMAG institute. At that time I was working on my PhD and gave a presentation of my own work (on automated diagnosis of mastitis problem, using artificial intelligence), but at that time I was quite skeptical about the prospects of automatic milking: would it really work? Those first robots did not look as elegant as they are now, and the performance was still far from perfect. Obviously I was wrong.

The economic question has since then not let me loose. A series of scientific publications has been made throughout the years, both for European as well as US circumstances. Most of these publications are so-called normative studies. They use estimations of costs of the milking robot, labour savings, production changes and compare this with an equal farm with a conventional milking parlour. These studies give great indications, but they are always theoretical. In 2007 we published a first studie (carried out by Ronald Bijl as an MSc thesis) on the economics of automatic milking based on real economic data, from an accountancy firm called Alfa Accountants en Adviseurs. In total, 62 farms (31 using an AMS and 31 using a CMS) were analyzed for the year 2003, using a case control study. Differences between years 2002 and 2003 also were analyzed, by comparing a sub-group of 16 farms with an AMS and 16 farms with a CMS. Matching was based on the time of investment in a milking system (same year), the total milk production per year, and intensity (kg/ha). Results of 2003 showed that the farms with an AMS used on average 29% less labor than farms with a CMS. In contrast, farms using a CMS grew faster (37,132 kg of milk quota and 5 dairy cows) than farms with an AMS (-3,756 kg of milk quota and 0.5 dairy cows) between 2002 and 2003. Dairy farms were compared financially based on the amount of money that was available for rent, depreciation, interest, labor and profit (RDILP). The CMS farms had more money available for RDILP (€ 15,566) than AMS farms. This difference was caused by larger fixed costs (excluding labor) for the AMS farms, larger contractor costs of € 6,422, and larger costs for gas, water and electricity of € 1,549. Depreciation and interest costs for automatic milking were not available,but were calculated based on several assumptions. Assuming larger purchase costs and a shorter depreciation time for AMS than for CMS, costs for depreciation and interest are larger for AMS farms than for CMS farms. So from that first study we concluded that automatic milking was more expensive than conventional milking. Which means that, automatic milking can be seen as a luxury good.

Very recently, another study was published. Wilma Steeneveld received a grant from WASS (the Wageningen Social Sciences Graduate School) and was able to visit prof. Loren Tauer from Cornell University to co-operate on the application of a relatively new method: Efficiency analysis, based on data envelopment analysis (DEA). With this method, you do not study the net income (or something like that), but the efficiency of a farm. The advantage is that not all inputs need to be translated into money, which is sometimes very difficult for inputs such as family labour and land. Data envelopment analysis compares the levels of inputs and outputs for a given farm against all other farms in the daaset to dermine the relative efficiency of farms. The efficiency of farms is related to the farm that was the most efficient. Data from another accountancy firm, Accon-AVM were used.

There were 63 farms in the data set with an automatic milking system and 337 farms with a conventional milking system, who did not differ from eachother in general farm characteristics. Farms with an automatic milking system had significantly higher capital costs (€12.71 per 100 kg of milk) than farms with a conventional milking system  (€10.10 per 100 kg of milk). Although the  farms with an AMS had a slightly lower technical efficiency (0.76) than the farms with a conventional milking system, this difference was not significant. This indicates that the farms were not different in their ability to use inputs (capital, labor, cows, and land) to produce outputs (total farm revenues).

This means that the economic performance of farms with an automatic milking system are almost equal to the farms with a conventional milking system. Good news for DeLaval, Lely and other manufacturers of automatic milking systems.