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The effect of inflation and form of investment on the estimated value of genetic improvement in farm livestock

Published online by Cambridge University Press:  02 September 2010

C. Smith
C. Smith
Affiliation:
ARC Animal Breeding Research Organisation, West Mains Road, Edinburgh EH9 3JQ
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Abstract

High rates of interest (8 to 15%) commonly used in discounted cash flow analysis of genetic improvement schemes have tended to underestimate the value of the returns and to favour breeding programmes with short-term returns. It is shown that inflation should be removed from the interest rate, and an inflation-free rate used in discounting future returns to present-day value.

Various methods for choosing discount rates are discussed. It is concluded that the appropriate rate is the real opportunity cost rate, that is the market cost of borrowing in real terms, in terms of goods rather than money. Taking account of inflation the average cost of borrowing in real terms in the United Kingdom over the past 32 years (1945 to 1976) is estimated as 2 to 3%. This also provides the best available estimate for discounting future returns, and it brings the opportunity cost rate into line with the social time preference rate often proposed for public investments.

The contrast is made between the value of improvements made in the national interest and of those made by breeders or firms. The former benefit from returns on all national commercial production of improved stocks and the returns accumulate and are recouped over many years. On the other hand breeders and firms benefit only from the extra sales of breeding stock due to their temporary marginal superiority over competition and they are often at high risk of getting no returns. Implications to the form and amount of investment in animal improvement are discussed.

Type
Research Article
Information
Animal Production , Volume 26 , Issue 2 , April 1978 , pp. 101 - 110
Copyright
Copyright © British Society of Animal Science 1978

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