The economic side of veterinary work: theoretical considerations

Economic side of veterinary work

1. Theoretical considerations

Who am I

Farm boy (dairy farm, 45 cows)

Animal science at Wageningen Univesity

●Epidemiology (simulation model of management around cystic ovaries)

●Economics (long term effect of herd health management programs)

PhD at Vet Medicine (AI programs to diagnose mastitis)

Working in field of animal health managementIn between Wageningen University and Faculty of Vet. Med.

●@henkhogeveen

●animal-health-management.blogspot.com

The veterinarian is valuable

To guarantee animal health

To guarantee public health

To guarantee animal welfare

Or 3G:

Global

Green

Guarantee

for foods and friends

The veterinarian is valuable

To guarantee animal health

To guarantee public health

To guarantee animal welfare

But it has to be paid ….

Economics for veterinarians????

This conference:± 60 postersno posters on economics

no need?

To provide advices to farmersAdvices are associated with costs and benefits

To sell yourselfWhy should a farmer hire you?

Outline

The farm level: Production economics

Effectiveness herd health control

Disease control: optimization

Use of economics by veterinarians

Result ….

Vets have to “sell themselves”.

Prove your value

A very basic start: the production function

Resource input (R)

Ou

tpu

t (Q

)

Farms can be more or less efficient

Resource input (R)

Ou

tpu

t (Q

)

Change in resource input: marginal effects

Resource input (R)

Ou

tpu

t (Q

)

Marginal output

Marginal input

Marginal effects of veterinary input

Veterinary input (R)

Out

put (

Q)

Change in output with different levels of veterinary input and all other factors equal

Veterinary input

Change in output with different levels of veterinary input and all other factors equal

Veterinary input (R)

Out

put (

Q)

What level of veterinary input is optimal?

Depends on:

●Price of veterinary input (drugs, time of vet)

●Price of products

Optimal level of veterinary input:

●When costs of 1 unit of additional (marginal) veterinary input

equals

the returns of additional (marginal) production

Veterinary input (R)

Out

put

(Q)

P-inputLine:

P-output

Lower price veterinary input (or higher price output)

Veterinary input (R)

Out

put

(Q)

P-inputLine:

P-output

Veterinary input (R)

Out

put

(Q)

Higher price veterinary input (or lower price output)

P-inputLine:

P-output

It is not that easy

Production function differ from farm to farm, dependant on:

●Management skills

●Farm seize

●Intensity etc.

So optimum veterinary input levels differ also

Farmers do not (always) behave rational

What can we do with this

This is an overall picture

Curative veterinary input vs preventive veterinary input

Veterinary herd health & production programs

Do we know effects?

Goal herd health programs

Optimalisation of:

●Health

●Production

●Production process

●Quality and safety

●Profitability Analysis

Goal

decision

Execution

Planning

Registration

Monitoring

Evaluation

Value herd health programs

Less losses due to diseasesNo guarantee

Additional attention prevention of problems ...

Research difficult, hardly anything done

Old stories

Sol et al (1975-1977)

Effects:

Better reproduction

Less culling

Lower feeding costsOnce upon

a

time……..

Grandma’s stories

Clinical trial 1974-1978 (!)

1500

1700

1900

2100

2300

2500

2700

Begeleid Controle

1974/75

1976/77

Difference: € 80/koe/jaar

Source: Sol et al., 1984

Long term effects

1500

2000

2500

3000

3500

4000

4500

Begeleid Controle

1974/75

1976/77

1980/81

1985/86

No significant differences anymore

Source: Hogeveen et al., 1992

New data

Participants Non participants

Number of cows 83 81

Milk production (kg milk/cow/year) 8591 8231

Percentage fat 4.4 4.4

Percentage protein 3.5 3.5

Calving interval (days) 416 419

AFC heifer (days) 795 807

Percentage non-return 56 days heifer 76 77

Percentage non-return 56 days cow 65 69

Number of inseminations/heifer 1.5 1.5

Number of inseminations/cow 1.9 1.8

Somatic cell count (cells/ml) (*1000) 218 226

Percentage cows high SCC 19 20

Percentage cows new high SCC 9 9

Percentage cows culled per year 25 24

Age at culling (days) 2117 2202

Source: Derks et al., 2013

Different intensity of herd health program

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

pregnan

cy ch

ecks

advice

on fert

ility

analy

sis prod

uctio

n numbe

rs

milk prod

uctio

n

udder

healt

h

nutriti

on

young

stock

reari

ng

claw he

alth

housin

g

never

when problems arise

not always, but regularly

always

No effect on effectivity could be seen (except for culling)

However, …..

Chicken and egg

There is a relation, no “real” causality

Economics are not studied

There is more than economics: other reasons

0%

20%

40%

60%

80%

100%

Een beterrendement

behalen (N=167)

Bedrijfsblindheidvoorkomen

(N=162)

Meer structuuraanbrengen in dewerkzaamheden

(N=160)

Eenbedrijfsprobleem

(N=158)

Regelmatigecontrole

bedrijfsgegevens(N=161)

Op aanraden vande dierenarts

(N=155)

Ver

delin

g va

n de

ant

woo

rden

helemaal wel

wel

neutraal

niet

helemaal niet

Better

profitability

Prevent

“blindness”

Provide

structure

Solution for a

disease

problem

Frequent look

at farm data

Adviced by

veterinarian

Reasons to not take a herd health program

0%

20%

40%

60%

80%

100%

Ik verwacht hogekosten (N=53)

Ik verwacht eenlaag rendement

(N=50)

Ik verwacht dathet me teveel

tijd kost (N=52)

Geen interesse(N=53)

Er is geen PCaanwezig (N=48)

Ik heb al eenandere instantieals begeleider

(N=50)

Er is geengoede

administratie opmijn bedrijf

(N=49)

Mijnbedrijfsomvang

is te klein(N=46)

Ver

del

ing

van

de

antw

oo

rden

helemaal niet niet neutraal wel helemaal wel

High costs Low profits Too much of

my own time

Not

interested

No computer I have

another

advisor

I have no

good data

Farm too

small

In short

Herd health programs seem to be effective

Not much real data

No recent economic data

Outline

The farm level: Production economics

Effectiveness herd health control

Disease control: optimization

Use of economics by veterinarians

What are you selling?

Drugs

Advices ->disease control

But are these cost-effective?

Yes they do reduce diseases

Or ……..

Economic effects of diseases

Expenditures (additional resources) ●Drugs

●Veterinarian

●Labour

●Expenditures to control disease

Losses (decrease in production)●Decreased production level

●Discarded milk

●Changes in milk price (milk quality)

●Culling

Total costs

Expenditures + losses

Often overlooked

90 % of studies only look at losses

Farmers tend to look at expenditures

We need to optimize

Source: McInerney et al., Prev. Vet. Med, 1992

Control vs failure

Control expenditures (€)

Output losses (€)

Source: McInerney et al., Prev. Vet. Med, 1992

High losses, low control expenditures

Control vs failure

Control expenditures (€)

Output losses (€)

Source: McInerney et al., Prev. Vet. Med, 1992

Low losses, high control expenditures

Control vs failure

Control expenditures (€)

Output losses (€)

Source: McInerney et al., Prev. Vet. Med, 1992

Optimal

Control vs failure

Control expenditures (€)

Output losses (€)

Distinction between losses and control

Treatments......are part of control

Costs of disease calculations:

●Production losses

●Culling

●Drugs

●Labour

●Veterinarian

●......

High losses, low control expenditures

Low losses, high control expenditures

Optimal

Let’s change terminology

Preventive costs (€)

Failure costs(€)

Animal diseases cost money

10 % of the gross production volume~ 40-50 % of the net income (Dijkhuizen, 1990)

£ 180/cow/year~ 20 % of the average gross margin (Esslemont and Kossaibati,

1995)

Now what if we improve diseases?

●For individual farmer

●For all farmers

Remember the production function?

Resource input (R)

Ou

tpu

t (Q

)

Together they form the supply curve

0 2 4 6 8 10 12 140

2

4

6

8

10

12

14

Less efficient

More efficient

S

Quantity

Price

S2

S1

Supply and demand -> equilibrium

0 2 4 6 8 10 12 140

2

4

6

8

10

12

14

S

Quantity

Price

Qe

Pe

D

Supply and demand -> equilibrium

0 2 4 6 8 10 12 140

2

4

6

8

10

12

14

S

Quantity

Price

Qe

Pe

D

Producer surplus

Supply and demand -> equilibrium

0 2 4 6 8 10 12 140

2

4

6

8

10

12

14

S

Quantity

Price

Qe

Pe

D

Consumer surplus

Producer surplus

Consumer surplus+

Producer surplus=

Social welfare

More efficient production (shift of supply)

0 2 4 6 8 10 12 140

2

4

6

8

10

12

14

S

Quantity

Price

Qe

Pe

S1

Qe1

Pe1

D

For individual farmer:

0 2 4 6 8 10 12 140

2

4

6

8

10

12

14

S

Quantity

Price

Qe

Pe

S1

D

Consumer surplus

Producer surplus

More efficient production (shift of supply)

0 2 4 6 8 10 12 140

2

4

6

8

10

12

14

S

Quantity

Price

Qe

Pe

S1

Qe1

Pe1

D

Consumer surplus

Producer surplus

So economic effects differ

Individual farmers:

●More efficiency

●More profit

Groups of farmers

●More efficiency

●Same profits for farmers

●Society benefits

●Lower prices

●More consumption

Outline

The farm level: Production economics

Effectiveness herd health control

Disease control: optimization

Use of economics by veterinarians

Veterinarians and economics

Important to know the economics of your services

●Herd health programs:

●What is the expected benefit

●Make a portfolio of satisfied producers

●Production diseases

●Find optimum of control and failure costs

●Know that farmers underestimate losses

Veterinarians are no economists

Yes you are right

But you should know something about it

Understand farmers

Understand the economics of your advice

Interpret calculations that are available

Veterinarians should know something about economics

Thank you for your attention Change in output with different levels of veterinary input

and all other factors equal

@henkhogeveen

animal-health-management.blogspot.com

On-line courses on Veterinary Economics on:

www.elevatehealth.eu