Animal Health Economics

Animal HealthEconomies
principles and applications
Aalt A. Dijkhuizen
Roger S. Morris
Internationale Agrarisch« Hogssclïool

Larenstein
/ B ibi'iöihetk
Posibus 7- 7400 AA Deveniez
Published by
Post Graduate Foundation
inVeterinary Science
University of Sydney
PO Box A985
Sydney South 1235 Australia
Ph: 612 9264 2122
Fax: 61 2 9261 4620
5 tJ
Contents
Preface
Framework and basic methods of economic analysis
1 How economically important isanimal disease and why?

R.S. Morris
1.1 Introduction 1
1.2 Mechanisms bywhich diseasemay alter animal productivity 2
1.3 Measurable effects of diseases onlivestock productivity 5
1.4 Effects of diseaseonherdproductivity 7
1.5 Effect of diseasecontrol measures onproductivity of animals 8
1.6 Effects of animaldiseaseonhuman and animal welfare 8
1.7 Methods of measuring theeconomic benefit of animal disease control 9
1.8 Concluding remarks 10
References 10
2 Economic decision making inanimal health management

A.A. Dijkhuizen, R.B.M. Huirne & R.S. Morris
2.1 Introduction 13
2.2 Thebasic economic model 13
2.3 Veterinary services asaneconomic inputfactor 16
References 23
3 Basicmethods of economic analysis

R.B.M. Huirne &A.A. Dijkhuizen
3.1 Introduction 25
3.2 Theneed for farm accounting systems 25
3.3 Enterprise budgets ingrossmargin form 27
3.4 Partial budgeting 28
3.5 Cost-benefit analysis 30
3.6 Decision analysis 36
References 39
4 Economic impact of common health and fertility problems

A.A. Dijkhuizen, R.B.M. Huirne, A.W. Jalvingh &J. Stelwagen
4.1 Introduction 41
4.2 Applications indairy cattle 42
4.3 Applications inswine 50
References 55
Contents
A d v a n c e d m e t h o d s of economic analysis
5 Critical steps in systems simulation

A.A. Dijkhuizen, A.W. Jalvingh & R.B.M. Huirne
5.1 Introduction 59
5.2 Systems and systems analysis 60
5.3 Deterministic and stochastic modelling 63
5.4 Common combinations of modelling type and technique 65
References 66
6 Linear programming to meet management targets and restrictions

A.W. Jalvingh,A.A. Dijkhuizen &J.A. Renkema
6.1 Introduction 69
6.2 Linear programming models ingeneral 72
6.3 Assumptions of linearprogramming 75
6.4 Amore realistic application toherd calving pattern 76
References 82
7 Dynamic programming t o optimize treatment and replacement decisions

R.B.M. Huirne, A.A. Dijkhuizen, P.van Beek &J.A. Renkema
7.1 Introduction 85
7.2 Methodological aspects 85
7.3 Brief introduction todynamicprogramming 89
7.4 Application of dynamic programming toreplacement decisions indairy cows 92
7.5 Application of dynamic programming toreplacement decisions in sows 95
References 97
8 Markov chain simulation to evaluate user-defined management strategies

A.W. Jalvingh, A.A. Dijkhuizen &J.A.M, van Arendonk
8.1 Introduction 99
8.2 Markov chains ingeneral 100
8.3 Concepts anddefinitions of states 103
8.4 Long-run properties ofMarkov chains 105
8.5 Simulation of herd dynamics 107
References 110
9 Monte Carlo simulation to model spread in management outcomes

W.E. Marsh & R.S. Morris
9.1 Introduction 115
Contents
9.2 Information systems andcomputer modelling 115

9.3 Monte Carlo modelling:basic principles 117
9.4 ORACLE: agenericmodelof livestock reproduction and production 118
9.5 DairyORACLE: adairy herd simulation model 123
9.6 PigORACLE: apig herd simulation model 129
References 132
Risky choice in animal health management
10 Scope and concepts of risky decision making

A.A. Dijkhuizen, R.B.M. Huirne &J.B. Hardaker
10.2 Components of arisky decision problem 136
10.3 Subjective expected utilitymodel 137
10.4 Otherchoice criteria 138
10.5 Bayes' theorem 142
10.6 Valueof information 144
10.7 Multiperson decision making 146
References 147
11 Application of portfolio theory for the optimal choice of

on-farm veterinary management programs
D.T. Galligan&W.E. Marsh
11.2 Simulation data 150
11.3 Portfolio model 152
11.4 Parametric analysis 155
References 157
12 Modelling the economics of risky decision making in

highly contagious disease control
A.A. Dijkhuizen,A.W. Jalvingh, P.B.M. Berentsen & A.J.Oskam
12.2 Demand and supply -theprice mechanism inamarket economy 160
12.3 Determining theindirect effects duetoexportbans 162
12.4 Foot-and-mouth disease outbreaks asanexample 163
References 169
Contents
13 Risk analysis and the international trade in animals and their products
S.C. MacDiarmid
13.2 Terminology 172
13.3 Analysis of risk 172
13.4 Managing risk 173
13.5 Examples 175
References 184
Decision support in animal health management
14 Examples of integrated information systems for

decision making at farm and national level
R.S. Morris, W.E. Marsh, R.L. Sanson &J.S. McKenzie
14.2 Decision support systems 188
14.3 Description ofEpiMAN 189
14.4 Extension toothernational animal health programs 194
14.5 Decision support systems for farm use 195
References 198
15 Profitability of herd health control and management

information systems under field conditions
A.A. Dijkhuizen,J.A.A.M.Verstegen, R.B.M. Huirne &A. Brand
15.2 Herdhealth and management control in dairycattle 202
15.3 Management information systemsin pigs 204
15.4 Future outlook 206
References 207
16 Disease control programs in developing countries:

prospects and constraints
B.D. Perry
16.2 Problem identification 210
16.3 Effective diseasecontrol technologies 211
16.4 Methods todeliver technologies and knowledge 213
16.5 Successful adoption and useof control measures by farmers 215
References 216
Contents
17 How dowe integrate economics into the policy development

andimplementation process?
A.D. James
17.2 Cost recovery for animal health services 220
17.3 Economic analysis of government-financed diseasecontrol programs 228
17.4 Economic analysis ofproducer-financed animalhealthprograms 229
17.5 Economic analysis of researchpriorities 230
17.6 Institutional arrangements for livestock policy analysis 231
Use of spreadsheets in animal health economics
18 Building aspreadsheet model

R.S. Morris, C.W. Rougoor & R.B.M. Huirne
18.2 Structure of spreadsheets 233
18.3 Choiceof program 236
18.4 Formulating asimpleeconomic analysis 236
18.5 Spreadsheet models withrisk considerations 239
18.6 User-friendly spreadsheets 241
18.7 Using the spreadsheet 242
18.8 Examples of theuseof spreadsheets inpractice 243
References 244
19 Computer exercises on animal health economics

C.W.Rougoor, A.W.Jalvingh,A.A.Dijkhuizen, R.S.Morris& R.B.M.Huirne
19.2 Basic methods
-Production function 250
-Partial budgeting 258
-Cost-benefit analysis 262
19.3 Advanced methods
-Linear programming 266
-Dynamic programming 270
-Markov chain simulation 276
19.4 Decision analysis for risky choice
-Monte Carlo simulation 283
-Decision analysis 288
-Decision-tree analysis 294
19.5 Answers 297
Subject index 307

Preface
AnimalHealthEconomics isarelatively newdiscipline,whichisprogressively developing

asolid framework ofconcepts,procedures anddatatosupport thedecision-making process
in optimizing animal health management. Research in thisfieldprimarily deals with three
interrelated aspects:(1)quantifying theeconomic effects of animal disease, (2) developing
methods for optimizing decisions when individual animals, herds or populations are
affected, and (3) determining the profitability of specific disease control and health
management programs andprocedures.
The book has been designed as aguide to the field of animal health economics and its
underlying methodology, and isprimarily aimed at: (1)students in veterinary medicine,
animal science, farm management and related fields, (2) veterinarians and extension
personnel involved inproviding animal health services, (3) government officials involved
indisease control policy-making, and (4)research workers in animal health management.
It isbased on an international postgraduate course organized by the International Training
Centre (PHLO),Wageningen Agricultural University in cooperation with the University's
Department of Farm Management andthe Massey University's Department of Veterinary
Clinical Sciences,Palmerston North,New Zealand.
The book includes contributions from internationally recognized experts from the
Netherlands, New Zealand, USA, UK and Kenya. These contributions range from a
description of thebasic economic framework and methods of economic analysis to more
advanced techniques and risky decision-making procedures in animal health management.
Their potential use and application inherd health control, government policy-making, and
disease control in developing countries are also discussed. Adiskette is supplied with the
book, containing practical exercises (in computer spreadsheets) on the various methods
andtechniques in animal health economics,including production function analysis, partial
budgeting, cost-benefit analysis, decision-tree analysis, Markov chain and Monte Carlo
simulation, linearprogramming anddynamic programming.
We would like tothank the authors for theircontributions, Diny Dijkhuizen for correcting
the text, Gerdien van Schaik and Arnold Wierda for the lay-out of the manuscript and
ErnstvanCleeffor thedesignofthecover.WealsoowethankstotheInternational Training
Centre (PHLO), Wageningen Agricultural University, and the Dutch Ministry of
Agriculture,NatureManagement andFisheries for theirhelpandfinancialsupport.
Wageningen /Palmerston North,May 1996

Aalt A. Dijkhuizen
Roger S.Morris
List of Tables
Table 6.1 Results of SME Herds - 78

Table 6.2 Results of the Optimum Herd Calving Pattern for Different Sets of Constraints -
80
Table A6.1 Base Price & Monthly Deviations in Prices of Milk, Calves, Replacement Heifer
& Carcass Weight - 84
Table 7.1 Calculation Model for Identical Replacement of a Fictitious Animal - 88
Table 7.2 DP-Solution Procedure for the Least-Cost Network Problem - 91
Table 7.3 Retention Pay-Off of Cows That Have Just Become Pregnant Three Months after
Calving - 93
Table 7.4 Critical Production Levels Below Which it is not Profitable to Inseminate Empty
Cows - 94
Table 7.5 Retention Payoff for Sows Pregnant at the First Moment of Conception after
Weaning - 95
Table 7.6 Critical Production Levels Below Which it is not Profitable to Breed Empty Sows
-96
Table 8.1 Data on Number of Sows Culled & Retained - 101
Table 8.2 Vector X at Different Time Periods - 102
Table 8.3 Possible Values of the State Variables Used to Describe States within a Cycle of
the Sow - 107
Table 8.4 Major Technical & Economical Benefits of Different Steady-State Herds - 109
Table A8.1 Basic Values of Biological Input Variables that Determine Transition Probabilities
Concerning Reproduction - 112
Table A8.2 Cycle-Specific Input Values Concerning Transition Probabilities & Technical &
Economic Results - 113
Table A8.3 Economic Input Variables & their Basic Values - 113
Table 9.1 Dairy ORACLE Reproductive Performance Indices Report - 127
Table 9.2 Dairy ORACLE Financial Statement Report - 129
Table 9.3 Simulated Data from Pig ORACLE in Pig CHAMP Performance Monitor Report
- 131
Table 10.1 Payoff Matrix for Two Herd Health Programs - 137
Table 10.2 Outcome According to the Various Decision Criteria - 141
Table 10.3 Summary of the Major Components of a Risky Decision Problem - 142
Table 10.4 Likelihood Probabilities of the Veterinarian Risky Decision Making - 143
Table 10.5 Calculation of the Joint Probabilities Risky Decision Making - 143
Table 10.6 Calculation of the Posterior Probabilities Bayes' Theorem - 144
Table 10.7 EMVs Based on Posterior Probability - 144
Table 10.8 Value of Information - 145
Table 11.1 Estimated Annual Cost of Simulated Veterinary Interventions - 151
Table 11.2 Simulated Five-Year Gross Margin Annuity Values for Dairy Enterprise under
Each Proposed Intervention - 152
Table 11.3 Estimated Annual Cost of Simulated Veterinary Interventions - 152
Table 11.4 Percentage Composition of Efficient Herd Health Programs from Results of
Parametric Analysis - 156
Table 12.1 Economic Losses Resulting from a Primary Outbreak FMD - 167
Table 12.2 Simulated Losses from a Theoretical Outbreak of Foot-And-Mouth Disease in a
Non-Vaccinated Population in the Netherlands - 168
Table 12.3 Stochastic Dominance Rules to Rank the Control Strategies In Case of a
Theoretical Outbreak of Foot-And-Mouth Disease in a Non-Vaccinated Population
in the Netherlands - 169
Table 13.1 Probability that a Test-Negative Animal is Actually Infected, Given a Test
Sensitivity of 0.95 & Specificity of 1 - 174
Table 13.2 Probability that a Test-Negative Infected Animal will be Included in a Group
Destined for Import - 175
Table 13.3 The Risk of Disease Being Introduced by an Embryo Transfer Program with a
Policy of a Single Test-Positive Disqualifying the Entire Shipment - 179
Table 13.4 Cases of Rabies Per Year, Reported & Projected Incidence, & the Probability that
a Randomly Selected Animal will be Infected with Rabies - 180
Table 13.5 Probability that Safeguards will Fail to Prevent the Introduction of Rabies - 181
Table 13.6 Estimated Risks of Introducing from the United States a Dog Incubating Rabies,
expressed as the Number of Dogs Per 1 Million. Ninety-Five Percent of the
Iterations of the ®RISK Simulation Model Produced Estimates Equal to or Less
than the Value Shown - 182
Table 15.1 Comparison of Program & Control Farms Before & During the Experiment - 202
Table 15.2 Margin Over Feed Cost Per Cow Per Year (US$) on the Program (P) & Control
(C) Farms
Table 15.3 MIS Effect in Relation With Sociological Classification Methods - 206
List of Figures
Figure 7.1 Determination of the Optimal Time for Replacement - 86

Figure 7.2 A Least-Cost Network Problem - 90
Figure 8.1 The Lily Pond - 100
Figure 8.2 The Lily Pond with Memory - 100
Figure 11.2 Expected Return & Risk of Two Interventions: Mastitis Control & Heifer Rearing
- 157
Figure 12.1 Demand & Supply Curves - 160
Figure 12.3 The Market Situation for a Country Exporting a Product - 163
Figure 12.4 An Overview of the FMD-Modelling Approach - 164
Figure 12.5 Basic Principles of the Export Model - 166
Figure 14.1 The Structure of EpiMAN - 190
Figure 17.1 Economic Analysis in Government Financed Disease Control Programs - 228
Figure 17.2 Economic Analysis of Producer-financed Health Programs - 230
Figure 18.1 Simple Spreadsheet: Benefit of 'Critical' Parasite Control Strategy Over 'No
Treatment' - 237
Figure 18.2 Example Probability Distribution Graphs (Normal, Uniform, Triangular, discrete,
Gamma & Weibull) - 240
Animal HealthEconomies
principlesandapplications
1
How economically important isanimal disease and why?
R.S. Morris
Department of Veterinary Clinical Sciences, MasseyUniversity, Palmerston North, New Zealand
Objectives
From thischapter thereader should gain knowledge of:
• the nature of the various effects of disease on feed intake and protein, energy and nutrient
metabolisms
• themeasurable effects of disease anddisease control measures onlivestock productivity
1.1 Introduction
The traditional distinction between animal health and animal production has become
increasingly blurred inrecent years, asthe trends inlivestock production systems have led
advisers to progress from formerly looking at single technical issues to now consider
multiple issues simultaneously in order to optimize the system. Greater and greater
emphasisisbeinggiven tofine-tuningthemanagement systembymodifying various facets
of the management strategy in response to monitoring data obtained from afarm. In the
health areathis trend has led toemphasis on subclinical diseases andtheir interaction with
management, asthemorespectacular andvisible diseaseshavebeenbrought undercontrol.
In dealing with animal health issues in livestock enterprises, economic evaluation has
become increasingly important astheeffects of thediseases which remain tobe controlled
are far more subtle than was the case for epidemic problems - where the question of
economics did not have to be raised because the answer was self-evident. Before it is
possible to develop appropriate techniques for improving the economic efficiency of a
livestock enterprise through health management methods,it isfirstnecessary todefine the
ways in which aparticular disease lowers productive efficiency.
Over the years since animal health economics first developed, it has become clear from
many studies that typically animal health measures yield veryhigheconomic returns tothe
livestock producer, although there areintriguing exceptions tothis generalization. At first
sight itisnotclearwhydiseasecontrolshouldbeanymoreprofitable thanother investments
afarmer might make,orwhythisgeneralfindingisnotuniversally true.Inordertoexplain
the unusual nature of the effects of disease on animals and hence to show how economic
studies on animal disease should be carried out, it is first necessary to define the exact
mechanismsbywhich adiseasecan influence productivity.Thisinformation isalsorelevant
toanimal scientists, whohave inmany cases failed torecognize theconfounding influence
of diseases in studies they undertake of management factors inlivestock production.
Chapter 1
Available feed not

Altered fully utilized by
feed intake animals-
consumed by
decomposers
Digestion Altered feed Nutritive value of

digestibility feed not fully
used, remainder
excreted
Metabolism Altered natural utilization

Altered respiratory Body material excreted in Consumed by
Protein I Energy I Minerals and efficiency faeces and urine to decomposers
other nutrients abnormal extent or used for fuel
X X 31
Consequential Premature Changed x
Reduced Reduced yield Reduced Altered 1_
production death value of body and/or quality of capacity production of Body material
effects in animals weight milk, eggs, wool, for work dung (used diverted for use
affected etc. for fuel) of disease agent
animals
=E
•• m 1
Herd Reduced Reduced fertility Lower precision
production productive life of and fecundity in recognition of animals Increased yield
effects animals of superior genetic merit of disease agent
Effects on herd maintenance Altered replacement pattern and reduced

and improvement capacity for genetic improvement
Figure 1.1 The various ways in which a disease may affect the productive value of animals in
a herd or flock
1.2 Mechanisms bywhichdiseasemayalteranimal productivity

Figure 1.1 summarizesthevariouspathwaysthroughwhichdiseasecanadversely affect the
productivity of alivestock herd.Inthecaseof infectious and parasitic diseases theunder
lying principle isthat adisease agent isinconstant competition with itshost for access to
nutrient supplies.The agent is successful if it can divert for its own use and reproduction,
nutrientswhichtheanimalwouldotherwisehaveusedfor growthandproduction.Theagent
must therefore have some adverseeffects onthe host if it istosurvive and multiply. Non-
infectious diseases cannot be understood in the same way,but dofrequently represent a
change inecological balance, inwhich theflow of nutrients and toxins (copper deficiency,
facial eczema, etc.) or of controlling signals (hypocalcaemia, ketosis, etc.) through the
agricultural ecosystem isdistorted byhuman orenvironmental interventions of sometype.
The purpose of Figure 1.1 is tosummarize allthepossible direct and indirect mechanisms
through which a disease can influence the productive efficiency of livestock. Not all
diseaseswill have all oftheeffects, but aneconomic study shouldconsider all possibilities
How economically important isanimal diseaseandwhy?
and select for examination those which appear to be relevant. Each of the mechanisms is
discussed individually, and then consideration is given tohow they should be combined to
evaluate the effect of disease on profitability.
Effects on ingestion
Many diseases alterfeed intake in affected animals. In almost all cases intake is reduced,
but rarely it may be increased. Diseases which cause pain during prehension (contagious
ecthyma of sheep) or mechanical difficulty (actinobacillosis of the tongue incattle) will
reduceintaketemporarily.Diseaseswhich affect locomotorability orreduceappetitedueto
a fever or similar discomfort will also lower intake. However, many diseases appear to
reduce intake in subtle ways which may not be recognized unless careful measurements
are made. These effects have been documented most carefully for parasitic diseases,
although in some cases intake has been reduced only in more severe forms of the disease
(Hawkins &Morris, 1978). Depression of feed intake can also occur in non-infectious
diseases such asnutritional deficiencies (Scott etal.,1980).
It is intriguing that feed intake should be commonly depressed by disease when other
evidence showsclearly thatfeedrequirementsareincreasedbymanyofthesamediseases,
since productivity falls under the influence of the disease.From the limited studies which
havebeen conducted to resolve this apparent paradox, it would appear that itresults from
disturbances inbodyhomeostaticmechanismsofthehost.Symons&Hennessy(1981)have
found that cholecystikin levels rise as appetite falls in Trichostrongylus colubriformis
infestations, and return to normal in line with appetite when the infestation is terminated.
In the same disease, corticosteroid levels rise and thyroxine levels fall inresponse tothe
parasite, while insulin levels fall apparently in response to reduced intake rather than
directly due totheparasite. Itisimportant todifferentiate between diseases which merely
depress feed intake and those which lower the efficiency of feed conversion - with or
without any effect on feed intake. The effect on intake iscalled the anorectic effect and
thatonfeed conversion efficiency thespecific effect. Thespecific effect isthemore serious
of thetwo,sincelowerproduction isachieved from the samefeed intake,andefficiency of
the production process is adversely affected, whereas the anorectic effect reduces both
intake and output without altering the efficiency of production. This is an important
consideration in studies of animals which consume purchased feed, such aspigs.It isless
important ingrazing ruminants,for which feed production iscloser tobeing afixedcost.
Effects of diseaseon feed digestibility

Disease agentsdonotnormally seemtoaffect feed digestibility,eveninthecaseofdiseases
which undoubtedly alter themorphology andphysiological function ofthe gastrointestinal
tract. Inlambs,for instance,it was found that abnormal mucosa wasnotnecessarily linked
topoor growth, and it seems that changes in the mucosal surface itself arenot responsible
for the change in feed conversion efficiency which results from parasitism and other
diseases,but ratherthephysiological processesthatoccurafter absorption. Similar findings
havebeen obtained with parasites such asFasciolahepaticawhich do not cause mucosal
Chapter 1
changes (Hawkins & Morris, 1978). One of the few reports of a reduction in feed
digestibility for ruminants was for magnesium deficiency in dairy cows (Wilson, 1980).
However, the situation maybe different inmonogastric animals,since inpigsit wasshown
that internal parasites caused reductions infeed digestibility (Hale etal. 1981).
It nevertheless seems likely that at least in ruminants adverse effects of disease on
productivity which cannot be explained by reduction in feed intake can reasonably be
attributed to lower feed conversion efficiency; although digestibility trials are a crude
method ofassessing changes indigestive function. However, these trials areexpensive and
demanding, and studies of the economic effects of disease become easier to conduct if
changes in digestibility can be disregarded as amajor factor in altering feed conversion
efficiency. It is also clear from the various studies inthis general field that the nature and
extent ofpathological changesinthebodycannotbeusedasanydirectguidetotheseverity
ofeffects of adiseaseonproductivity.
Effects of disease on physiological processes

Diseases can modify many different physiological processes, such asnutrient metabolism,
respiration and excretion. Most of the available data relate to parasitic diseases, but the
evidence from these studies suggests thatthe fundamental effect isonprotein metabolism.
In gastrointestinal nematode infestations, plasma is lost into the digestive tract at the
attachment sites of the parasites, and haemoglobin is also removed by blood-sucking
parasites.Much of this protein is digested and reabsorbed lower in the tract, but the host
uses energy and protein to replenish the mucosa and plasma proteins which have been
depleted. This places demands onthe liver and increases its nutrient utilization. There is
increased excretion ofnitrogen asureainurine,demonstrating thatrecyclingofthenutrients
is not completely efficient in maintaining nitrogen balance, even though considerable
energy costs areincurred bythe host for increased protein synthesis.
Animals tend in these circumstances torun down their pool of plasma proteins because
production in the liver cannot keep pace with the loss, even though the synthesis rate is
unusually high. Adjustments are made toother nitrogen-using processes of lower priority,
notably synthesisofwoolprotein andmuscleprotein.Insheep,sulphur-containing proteins
are put in especially short supply by Trichostrongylus colubriformisinfestation, demand
cannot bemet, andwool production shows anexceptionally large fall.
If feed intake is reduced either due tothe parasite or to a low plane of nutrition, protein
intake may fall below thelevelrequired tomaintain anadequate serumprotein pool.Bown
et al. (1986) have shown that direct post-ruminal infusion of casein in sheep receiving
daily doses of larvae of Trichostrongylus colubriformis increased nitrogen retention
fivefold, and supported the argument as outlined above that the primary defect is one of
protein loss and an anabolic cost of tissue regeneration. Infusion of glucose in amounts
isocaloric with the casein only doubled nitrogen retention, showing that energy
supplementation wasnot asbeneficial asprotein replacement.
A contrasting example to Trichostrongylus colubriformis is the cattle tick Boophilus
microplus, which sucks blood much like some internal parasites, but differs in that the
Howeconomically important isanimaldiseaseandwhy?
animal cannot recover any of the nutrient content of theblood in this case. In studies on
theeffects of ticksonhostmetabolism itwasfound that haemoglobin and plasma albumin
fell, whereas globulin rose.Thus the animal was able to synthesize increased supplies of
globulins,butcould notmaintain levelsoftheotherbloodconstituents.This wasattributed
in part to adisturbance of protein metabolism, but the injection of atoxin by thetick was
alsohypothesized.Tofurther emphasizethetenuouslinkbetweenthepathologyofadisease
and its effects on productive processes, O'Kelly and Kennedy (1981) found that ticks
adversely affected function in the gastrointestinal tract and reduced organic matter
digestibility. It is difficult to explain why this should be so when such effects are not
common for parasites directly affecting the tract.
Although these are the two most fully studied diseases, evidence for other diseases ina
variety ofspeciesconfirms thecentralimportanceofthederangementofprotein metabolism
inthe diseaseprocess.
There isalsoimpairment of energy metabolism, butthis appearstobelargely secondary to
the alterations inprotein metabolism, andisaresult primarily of the energy costs of tissue
regeneration. Mineral and micronutrient metabolic flows are also altered by parasitic
diseases, which are the only ones to have been studied. There is reduced retention of
ingested calcium and phosphorus in growing sheep infested with Trichostrongylus
colubriformis or Ostertagie circumcincta. Consequently, bone growth and skeletal
development areimpaired;andthiscanreducematurebodysizeandcapacity toaccumulate
muscle.Cobalt, copper and vitamin status of animals have all been reported tobe affected
byparasitism aswell.
Sincelung diseasecan adversely affect productivity, another mechanism by which disease
might impair physiological function is areduction in respiratory function. It seems more
likely, however, that itistheregenerative process following lung diseasewhich causes the
production deficit.
1.3 Measurable effects of diseases on livestock productivity

Thefunctional derangementsdescribed abovetranslateintomeasurableeconomiceffects in
anumber ofways, alsosummarized inFigure 1.1.
Premature death
This effect istheeasiest of alltheconsequences of disease tomeasure, andtherefore tends
tobeconsiderably overemphasized incomparison with other effects. Ineconomic studies,
death losses should be measured asthe difference between the potential market value of
the animal and its value when dead (which may not be zero), less the costs which would
havebeen incurredinobtainingthemarketvalue (suchasextrafeed andcaretomarketage,
marketing costs,etc.).
Changed value of animals and products from slaughtered animals

Diseasedanimalsmayhavelowermarketvalueeitherduetovisiblelesionsorduetoindirect
changes in appearance or body confirmation which make them less attractive tobuyers.
Chapter1
True market value of final products may be altered due to changes in the ratio of meat to
fat or to bone or reduced protein content. The value of offals may also be reduced due to
pathological changes caused by agents such as Fasciola hepatica or Echinococcus
granulosus.Presenceoflesionsofazoonoticdiseasemayrendertheanimaltotally unfit for
consumption.
Somediseases (suchascaseouslymphadenitis insheep)mayrenderproductsless attractive
to the consumer for aesthetic reasons, and hence may reduce meat consumption. Diseases
which affect the skin, such as warble fly infestation or even sheep lice, may reduce the
market value of hides ortheir valuetotheuser.
Reduced live weight gain

There have been very many studies published on the effect of diseases on weight gain in
animals, and in general they find that diseased animals gain weight more slowly than
equivalent disease-free animals. Notable as an exception is lice infestation in cattle.
Differences inweightgainbetween infested andlice-free animalsaremodestornegligible,
and certainly notenough to yield aneconomic benefit from treatment.Therefore caution is
required in assuming an effect on weight gain of adisease without experimental data to
support it.
Reduced yield and quality of products from live animals

Yield of products such as milk, wool and eggs may alsobe reduced by disease, and there
have been numerous papers showing theeffect ofvarious diseases onwool growth ormilk
yield. Quality of the products may also be reduced, as in the case of the changes in milk
composition which result from bovine mastitis, and which may or may not be detectable
by the consumer. In the first case price will fall and the livestock producer will suffer; in
the second case,the consumer will suffer the loss.Ithas alsobeen shown that disease can
affect thetaste of meat (Garriz etal.,1987).
Reduced capacity for work

Worldwide, the single most important use of animals isas asource of traction. The second
largest (after dung)productive energyoutputofanimalsindevelopingcountriesisfor work;
products considered ofcentral importance in developed countries are seen as byproducts
indeveloping countries.Therehavebeennopublished reportsdirectly measuringthe effects
of diseases on capacity for work, but field evidence is that diseases can severely curtail
rice paddy preparation and othertasksfor which animals areessential, sothiseffect canbe
very important and should therefore be considered indeveloping countries.
Altered production of dung for fuel and fertilizer

In Asia and Africa cattle dung is a vital source of cooking fuel, and in much of the
developingworld itisanimportant fertilizer. Diseaseswhichcausehighdeathratesincattle
will alsoindirectly influence human nutrition byreducing dung supplies.
How economically important isanimal diseaseandwhy?
Altered feed conversion efficiency

Asdiscussedearlier,itappearsthatdiseaseprimarilyaffects animalproductivity byaltering
the metabolic processes for protein and other nutrients, thereby reducing the feed
conversion efficiency of affected animals and producing anumber of ramifications which
reduce herd productivity. Feed intake may also be reduced, but this is not usually the
primary effect.
Feed conversion efficiency is the ultimate measure of the influence of disease on the
production process, but its measurement requires accurate measurement of feed intake,
which isonly possible undercontrolled feeding conditions. Ingrazing systems itisusually
reasonable to take changes in productivity as an adequate indication of changes in feed
conversion efficiency when comparing diseased and disease-free animals kept under
identical conditions.
Intuitively, it seems likely that the rate of decline in productivity would increase as the
disease becomes more severe, and body functions become more deranged. However, the
limitedevidenceavailablefavours thealternative viewthatthemostdramaticchangesoccur
at low or subclinical levels of disease, and that each additional parasite, for example, has
lesseffect thantheonebefore it(Hawkins&Morris, 1978).Thisemphasizesthe importance
of the health management approach in which the focus is on optimizing productive
efficiency rather than the clinical approach in which a disease must be detectable tobe
considered important.
1.4 Effects of disease on herd productivity

The effects of disease flow through from consequences for individual animals to broader
ramifications for herd replacement and improvement.
Reduced productive life of animals

Apart from animals which die, all remaining herd members are culled when the farmer
considers themlesspotentially productive thantheanimal whichwould replace them.This
issuehasbeeninvestigatedindetailintheNetherlands (VanArendonk, 1985; Huirne, 1990;
Houben, 1995) and in Denmark (Kristensen, 1993). They showed that in general a
substantial economic benefit could be achieved bytaking action toextend theherd life of
theaveragedairycoworsow,principally byreducingtheamountofcullingduetoillhealth.
This is not limited todisposal specifically because of disease,but also includes culling for
low yield or other reasons, where the underlying cause is lowered productivity due to
disease, andthe farmer beingunaware of this fact.
Lessaccurate genetic selection

If adisease alters any of the components of productivity which are the subject of genetic
selection pressure intheherd (such asmilk orwool yield),it will affect theefficiency with
which animals of superior genetic merit are identified, especially if the probability of an
animalbeingaffected bythediseaseisunrelated toyieldlevel.Provided susceptibility tothe
disease and yield level are not correlated, the presence of the disease will confound the
Chapter 1
genetic selection effort. Forexample,itwas shown thatinternal parasitism can affect wool
production by sheep in ways which distort selection by objective measurement of wool
characteristics. Since, for practical purposes, resistance to internal parasitism cannot be
regarded as a heritable trait, genetic selection will be more efficient if effective parasite
control iscarried out intheherd.
Effects on capacity to maintain and improve the herd

If less progeny are born, fewer animals are available as herd replacements or for sale as
marketproducts.Thusnotonlywilllivestock saleincomebereduced,but alsomanagement
flexibility for herd improvement will be curtailed. It is self-evident that diseases of the
reproductive tract in both males and females can substantially reduce the level of
reproductive performance, and hence the number of progeny born in the herd. Less
obviously, diseases which adversely affect body metabolism (but donot directly affect the
reproductive tract) can also affect the number of progeny born.The mechanisms have not
beenfully explored,butmaywelloperatethroughaneffect onliveweight andcondition,or
throughindirectmeans suchastheinduction ofpyrexiaatcritical stagesinthe reproductive
process. For example, both gastrointestinal parasites and liver fluke have been shown to
affect reproductive performance in ewes. In cattle, bovine leucosis and ephemeral fever
havebeen reported toaffect reproduction.
Ifreproductive performance is toopoor, it may even become impossible to maintain herd
sizethrough home-bred replacements, necessitating thepurchase ofbreeding animals with
alltheadditional riskswhichthatentails.
1.5 Effect of disease control measures on productivity of animals

Inevaluatingtheeconomicbenefit ofdiseasecontrol,itisnecessary toconsidernotonlythe
difference inproductivity between diseased and disease-free animals,but also the changes
inproductivity which follow elimination of adiseasefrom anaffected animal.
This has notbeen studied for very many diseases, but some examples exist. For instance,
bovine mastitis appears tobe adisease for which complete regeneration occurs in most
animals over thedry period following elimination of aninfection (Morris, 1973), although
yieldremainsdepressed fortherestofthelactation inwhich acureisachieved.Conversely,
when infestations with Fasciola hepaticaareeliminated in growing animals, sheep do not
regain theirformer productivity orfeed conversion efficiency. Therefore each disease type
must at least inthe first instance be considered separately, since the nature and extent of
recovery following elimination ofadisease is notpredictable from general principles. The
selection of aneconomically optimal control strategy will be strongly influenced by this
consideration.
1.6 Effects of animal disease on human and animal welfare

Effects on human nutrition
The major direct effect of animal disease on human well-being is through reducing the
supply of high quality protein, for example, diseases which reduce the supply of milk for
8
Howeconomically important isanimal diseaseandwhy?
young children. Animal products are also important sources of other nutrients, notably
mineralsandvitamins,anddiseasescanbothreducethetotal supply ofanimalproductsand
modify thecomposition of animal products inways which reduce their nutritional value.
Effects on community development

As well as the effects on human nutrition, animal diseases can affect other aspects of
community welfare, especially indeveloping countries. Asdiscussed earlier, the twomost
important services provided by animals in such circumstances are traction and dung
production. Disease may reduce the supply of both of these. Animals are also important
sources of products (wool,hair, hides, feathers, fur, etc.) used for clothing, decoration and
forthemanufacture ofutensilsandotherproducts.Afurther effect ofthoseanimal diseases
which arezoonotic istocause disease in the human as well asthe animal population, thus
amplifying their impact.
Cultural significance of animals

In most communities animals serve functions far beyond theutilitarian roles which arethe
focus ofthischapter.Whilethesearenotstrictlyeconomicinnature,theyarevital functions
which shouldbeincluded inany consideration ofthe significance of animal disease.
Animal welfare
In considerations of animal welfare issues, little is said about the importance of ensuring
through disease control that animals are in ahealthy state -yet this is avitally important
issue inprotecting the welfare of managed animals. It deserves more prominent attention
in discussions of animal welfare matters. There have been surprisingly few efforts to
quantify welfare effects of diseases,andmost oftheinformation availableisopinion rather
than solid evidence.However, some efforts havebeen madetodefinejust what the effects
are(Gibson, 1987;Webster, 1995).Someofthemechanisms through whichdisease affects
the welfare of animals are starting tobeelucidated (Rothwell &Dantzer, 1992).However,
greaterbiologicalunderstanding willbeneededbefore quantitative assessmentsofthe effect
of disease onanimal welfare canbe attempted.
1.7 Methods of measuring the economic benefit of animal disease control

The past practice of considering the cost of disease was unsound, and has given way to
economically sound analyses which estimate the economic benefit of control measures
(Schepers &Dijkhuizen, 1991).Many such studies havebeen published overrecentyears,
and there aregoodpublished models for analyses of most major typesofdiseases.
Such studies willhavethegreatest realism andpractical relevance ifthey areconducted on
farms. The simplest approach is to compare alternative control programs within farms,
provided that this isepidemiologically sound for the particular disease. Ideally, anumber
of farms should be included in such studies toobtain estimates of variation in outcome
between farms.In somecasesit maybe necessary toconduct acomparison solely between
farms because the farm is the smallest feasible experimental unit. This is quite practical
Chapter 1
but requires a large number of farms because of the extent of variation in uncontrolled
factors between farms.
There are standard economic techniques which should be used to describe and summarize
the outcome of economic studies. The most common ones are partial budgeting,
cost-benefit analysis and decision analysis. Each of these techniques, their application and
limitations are discussed in more detail in following chapters of this book.
The focus of economic studies must be on estimating the benefit of action against a disease,
rather than just on the economic impact of the presence of a disease. Although it is not
possible to get all of the economic data which might be desired for every disease,
experimental studies can now be supplemented and expanded using other analytical
approaches, of which computer modelling is among the most useful. It is also necessary, in
cases where chance is an important element in the epidemiology of the disease, to include
an evaluation of the riskiness of each of the alternative courses of action in economic
studies. There are standard economic procedures for doing this, which are also discussed
in following chapters.
1.8 Concluding remarks

If the understanding of disease processes and their effects described above are to form the
basis for veterinary services to livestock, then the focus of these services needs to be one
of health management rather than principally disease treatment. A rational approach to
provision of health care requires that theproductive and welfare significance rather than the
pathological severity of the disease should be the measuring stick for livestock. In this
way health and production issues can be brought together for the benefit of the livestock
producer and equally of the consumer.
References
Bown, M.D., Poppi, D.P.&Sykes, A.R., 1986.The effect of post-ruminal infusion of protein or
energy onthepathology of Trichostrongyluscolubriformisinfection onbody composition inlambs.
Proceedings of theNew Zealand Society of Animal Production 46:27-30.
Garriz, CA., Gallinger, M.M., Touraille,C, Steffan, P.E.,Fiel.CA., Ambrustulo, R.R., Biondani,
CA., Zamorano,M. &Bulman, G.M., 1987.Gastrointestinal parasitism: its effects on muscle, fat
and bone composition of the carcass and organoleptic characteristics of meat. Proceedings
MSDAgvet Symposium on Gastrointestinal Parasitism, August 19, 1987:59-68.
Gibson, T.E. (ed.), 1987. Animal disease - a welfare problem? British Veterinary Association
Animal Welfare Foundation, 96pp.
Hale, O.M., Stewart, T.B.,Marti, O.G., Wheat. B.E. &McCormick, W.C, 1981. Influence of an
experimental infection ofnodular worms(Oesophagostomumspp.) onperformance ofpigs.Journal
of Animal Science 52:316-322.
10
How economically important is animal disease and why?
Hawkins, CD. &Morris, R.S., 1978.Depression of productivity in sheep infected with Fasciola
hepatica. Veterinary Parasitology 4:341-357.
Houben, E.H.P., 1995. Economic optimization of decisions with respect to dairy cow health
management. PhD-Thesis,Department ofFarmManagement, Wageningen Agricultural University,
Wageningen, 146pp.
Huirne, R.B.M., 1990.Computerized management support for swine breeding farms. PhD-Thesis,
Department of Farm Management, Wageningen Agricultural University, Wageningen, 165pp.
Kristensen, A.R., 1993. Markov decision programming techniques applied to the animal
replacement problem. Doctoral dissertation, The Royal Veterinary and Agricultural University,
Copenhagen, 183pp.
Morris,R.S., 1973.Thedepression ofquartermilkyieldcaused bybovinemastitis,and the response

of yield to successful therapy. Australian Veterinary Journal 49: 153-156.
O'Kelly, J.C. & Kennedy, P.M., 1981. Metabolic changes in cattle due to the specific effect of the
tick Boophilusmicroplus.British Journal ofNutrition 45:557-566.
Rothwell, N.&Dantzer, R., 1992.Interleukins in the brain. Oxford: Pergamon Press, 207pp.
Schepers, J.A. &Dijkhuizen, A.A., 1991. The economics of mastitis and mastitis control in dairy
cattle: acritical analysis of estimates published since 1970. Preventive Veterinary Medicine 10:
213-224.
Scott,PR., Kelly,J.M.,Whitaker,D.A.&Cameron,N.D., 1980.Marginal magnesiumdeficiency as

a possible cause of reduced voluntary intake in commercially managed dairy cows. Veterinary
Research Communications 4: 225-229.
Symons, L.E.A. & Hennessy, D.R., 1981.Cholecystikin and anorexia in sheep infected by the
intestinal nematode Trichostrongylus colubrifonnis. International Journal of Parasitology 11: 55-59
Van Arendonk, J.A.M., 1985. Studies on the replacement policies in dairy cattle. PhD-Thesis,
Department of Animal Breeding and Department of Farm Management, Wageningen Agricultural
University, Wageningen, 126pp.
Webster, A.J.F., 1995.Understanding thedairy cow.BSPProfessional Books,Oxford, 357pp.
Wilson, G.F., 1980. Effects of magnesium supplements on the digestion of forages and milk
production of cows with hypomagnesaemia. Animal Production 31: 153-157.
11
2
Economic decision making in animal health management
A.A. Dijkhuizen 1 ', R.B.M. Huirne 1 ' & R.S. Morris 2 )

1)Department of Farm Management, Wageningen Agricultural University, Wageningen, the
Netherlands
2) Department of Veterinary Clinical Sciences, Massey University, Palmerston North, New
Zealand
Objectives
From thischapter the reader should gainknowledge of:
• basic principles underlying economically sound decision making
• major components of aconceptual model for economic analysis
• production function principles
• cost functions
2.1 Introduction
Economics issometimesqualified asthediscipline that simply measures things inmonetary
units, while everyone else uses physical units.This view, however, is far too simple and
inappropriate. Economics -as ascience -primarily deals with decision making, whereby
moneyisonlyoneoftheelements.Animalhealtheconomics,therefore,canbedescribedas
thediscipline that aims toprovide aframework of concepts,procedures and data to support
thedecision-making process inoptimizing animal health management (Dijkhuizen, 1992).
Controlling the cost of production isbecoming critically important in modern livestock
farming. Improvinganimalhealthandfertility canplayamajorroleinachievingefficient and
economically rewarding production. Current veterinary services are evolving tomeet the
needfor servicetargeted tightly totheneedsof farmers throughplanneddisease prevention
andcontrolprogramsandmanagementforoptimumhealth.Theapplication oftheseservices
israrely an all-or-nothing affair. Usually several programs or measures are available, each
ofthemoffering adifferent degreeofprotectionandrequiringadifferent levelofinvestment.
Determining the optimum input level, therefore, is to alarge extent amatter of economic
decision making.Not only isthis the case for theindividual livestock owner,but also fora
nationalgovernment thatmustdetermineanoptimumpolicyonspecific contagiousdiseases.
In thischapter thebasic economic framework and principles torely onwhen dealing with
these aspects arediscussed and illustrated.
2.2 The basic economic model

The basic conceptual model underlying economic analyses includes three major
13
Chapter 2
components: people, products and resources. It is people who want things and make
decisions, therefore being the driving force for economic activity.Products are goods and
services that satisfy people's needs and may be regarded as the outcome of economic
activity.Resourcesarethephysical factors andservicesthatarethebasesfor generating the
products,and,assuch,arethestartingpointsofeconomic activity.Thesethree components
canbeputtogether toportray thebasic conceptual model that underlies economic analysis
(Figure2.1).
Resources Products People

production consumption
(Costs) (Value)
Figure 2.7 Thebasicmodel underlying economic analysis (Howe &Mclnerney, 1987)
In Figure 2.2 animal disease isportrayed in the system as an influence which affects the
livestock resource transformation process and results in extra resource use and/or fewer
animalproductsthanbefore (directeffects). Thesedirectlossesmaybeimmediately visible
(death, abortion), or obscured (reduced milk yield).Animal disease may also affect other
parts oftheeconomic system,thusdiminishingbenefits topeople (indirecteffects). These
indirect losses can bedivided intothose that arefairly obvious (collapse of export trade),
and those that areobscure (constraints onagricultural developments).
Probably the most useful addition to this basic economic model for certain decision
situationswouldbetoincludealoopindicatingthat someanimal 'products' arenotused for
human consumption but asbreeding stock, and soform part again of the resource base.In
doing thisthe notion of 'capital' isintroduced.
Livestock -»- Livestock

resources products
Direct effects
Disease People
Indirect effects
Other ->- Other

resources products
Figure 2.2 Livestock production in the wider economic system
Toexpress the physical effects in economic terms, the 'value' of products and 'cost' of
resources are required. The idea of value is not intrinsic in any product or service, but is
determined by the people's request for the products, and is relative to their availability
14
('supply and demand'). Economics attempts to deal with the real value of any product,
which may or may not be accurately captured in its recorded price. Similarly, the idea of
cost stemsfrom theresourcesthatareusedinmakingaproduct available.Thisunderliesthe
definition ofthereal cost (or 'opportunity cost').Theopportunity cost of usingaresource
in aparticular way is the value of that resource if it were used inthebest alternative way,
which again may not adequately be reflected by financial expenditures incurred in its
production. Both 'real value' and 'real cost' -and hence the losses from one and the same
disease -may differ considerably across the various economic levels tobe considered, ie,
the individual farmer, thejoint livestock owners,theconsumers andthe national economy,
asisillustrated inTable 2.1.
In the case of the common diseases that the individual farmer can control (eg,mastitis),
supply anddemandforce animalproductmarketpricestochangeovertimewiththeaverage
diseaselevel.Thustheresultinglossesaretransferred totheconsumers,andconversely itis
the consumer whobenefits from improved animal health. On asufficiently large market
(suchastheEuropean Union)thereishardly anyrelationbetweentheextentandseverityof
these diseases on the one hand, and the average income of thejoint livestock owners on
the other.However, for the individual farmer this linkage doesexist.The farm in question
may suffer more (or less) from disease than is compensated for by the average 'disease
margin' included in the market price. To a lesser extent this also applies to a group of
livestock owners.
In the case of an epidemic of contagious diseases (eg, foot-and-mouth disease), market
pricesof output primarily depend onwhether ornotrestrictions onforeign tradewillbeim
posed. When an outbreak doesnot lead toexport bans,the market prices may temporarily
rise alittle,depending on the spread and duration of theoutbreak. Ifexports are restricted,
however, prices in countries that export much will drop substantially due to an oversupply
on the domestic market. This fall in price causes losses which may greatly exceed the
direct losses from the disease owing to, for instance, mortality. Unaffected farms also
suffer from thisdropinmarket prices.Consumers willbenefit, however,making the losses
tothenational economy considerably fewer than those tothejoint livestock owners.
2.3 Veterinary services as an economic input factor
2.3.1 Production function principles

Thecalculation of theeconomic losses isnot only important for adescription of the actual
situation, but also for how, and more specifically, to what extent it can help to answer
questions such as:(1) how tolimit the losses asmuch aspossible if diseases dooccur, and
(2)inwhat wayandtowhatextentcantheriskofdiseasebediminished, howmuchlosscan
beavoidedandwhatefforts andcostsareinvolved?Tobasetheanswersonsoundeconomic
criteria, insight into the relationship between the input and output of disease control
(ie, veterinary services) is essential. Here, production function and cost analysis play a
central role.
The technical relationship between the amount of input(s) and the output produced is
15
Chapter 2
Table 2.1 Losses due to animal disease at various economic levels

Type of disease
A B
Disease generally Outbreaks of contagious diseases
present, but varying in on a national or regional scale
degree per farm B1 B2
Foreign trade restrictions No foreign trade
Economic level restrictions
1.Farm (individual Direct relation between Great incidental loss, Great loss to the
producer) loss and degree of the even if the farm is not affected farms (possible
disease per farm. affected by the disease. compensation for
Particularly in pig and Possible compensation destroyed animals);
poultry farming great for destroyed animals. advantage to farms not
effect on income. affected.
2. Sector (joint Loss, if the price does Significant loss, Moderate loss
livestock farmers) not adjust itself. Ona particularly in the case (depending on possible
sufficiently large of export products, compensations and on
market (eg, the EU) resulting from dropping degree of price
hardly any relation prices owing to failing adjustments).
between level of demand.
disease and income of
livestock farmers, due
to price adjustment.
3. Supply and
processing industries;
service and trade 3
4. Consumer Loss owing to higher Incidental advantage. Slight loss.

prices.
5. National economy Loss owing to Disadvantage Disadvantage can be

inefficient use of considerably less than more than tojoint
resources. loss tojoint farmers farmers (2B2), but less
(2B1). than5Bl.
a
Possible effects have not been specified. Price changes areassumed tobepassed ontothe consumer fast and
completely.
16
referred toasthefactor-product relationshiportheproduction function (Boehlje&Eidman,

1984). It is also commonly referred to as the input-output relationship or response curve.
The relationship relates to the amount of products that can be produced for alternative
combinations of inputs within a specified time interval, for example one year. If Xj
representstheamount ofthei"1input (eg,veterinary services) andYrepresentstheamount
ofproductsproduced (eg,kgofweightgain),thentheproduction function canbewrittenas:
Y=/(X 1 IX 2 ,...,X n )
This relationship indicates that the amount of product Yis a function of the amount of
variable inputXj andthe level of thefixedinputs X 2 through X n .
The relationship between the amount of a single variable input and the output of a single
productcantakeoneofthreegeneralforms:constantproductivity,diminishing productivity
and increasing productivity of thevariable input. Constant productivity exists when each
additional unit of variable input added tothe fixed factor(s) increases output by the same
amount. Withdiminishing productivity each additional unit adds lesstototal output than
the previous one, whereas with increasing productivity the opposite occurs.The most
classical production function is assumed to include both increasing and diminishing
productivity, asisillustrated inFigure2.3.
Totalphysical product (TPPxj) growsatanincreasingrateuntiloutput levelaisreached,
and increases at adecreasing rate between aand c. Beyond output level c, total physical
product declines with increased input of Xj.
Twoothertechnicalrelationships -themarginal physical product (MPPxj) andthe average
physical product (APPxj) -canbe derived from theproduction function and are important
in selecting the optimum amount of a variable input. Marginal physical product is the
increment to total physical product attributable to the addition of a single unit of input
(MPP xl =ATPP xl /AX 1 =AY/AXj) and is,therefore, equal to the slope of the TPP curve
at anylevel of input. Averagephysical product isequal tothe average output per unit of
variable input and iscalculated astotal physical product divided bythe amount of variable
input used (APP xl =TY?xX/Xx =Y/Xj).
From these relationships, three stages of production can be defined, as is also shown in
Figure 2.3.Stage 1 isdefined as the area in which marginal physical product islarger than
average physical product. In Stage 1 the MPP x j curve increases, reaches its maximum
(when output gets to level a), and then declines. Average physical product increases
throughoutthestageandreachesamaximum attheboundarybetween Stages 1 and2(when
output gets tolevel b).Notice that at thisboundary marginal physical product and average
physical product areequal.Within Stage 2marginal physical product is further declining,
and reacheszero attheboundary between Stages2and 3(when outputgetstolevelc).
Average physical product is declining and positive throughout Stage 2. Stage 3 is
characterized by declining total physical product and negative (and declining) marginal
physical product. Average physical product, ofcourse,continues todecline inStage3.
The three stagesprovide the decision maker withuseful information indefining the range
17
Chapter 2
Figure 2.3 Theclassicalproduction function
which isthe most efficient for production. Itwould be irrational tooperate ineither Stage
1orStage3regardlessofthelevel ofinputandproduct prices.Itisobviousthat onewould
not want to operate within Stage 3.Applying additional units of the variable input and
forcing production intoStage3reducetheamountoftotalproductproduced.Ifthepricesof
the variable input and the product are assumed to be constant and positive, one would
makemoremoneybyleaving someofthe variableinput unused.Producing within Stage1
isnot rational either,because amoreefficient useof the variable input canbe obtained by
higher levels of input until the APP x j curve reaches itsmaximum. Production, therefore,
should alwaysoccurinStage2,butthedecisionmakermustconsiderthepricesofinputand
output inordertodetermine exactly theprofit-maximizing level of the variable input tobe
used.
Tobetterillustratethethreetechnicalrelationshipsdiscussedbefore, ahypothetical response
toanthelmintic dosing ingrowing cattle is summarized inTable 2.2
18
Economic decisionmaking inanimal health management
In Table 2.2 the average physical product curve reaches its maximum with five doses,
indicating theboundary between Stages 1 and2.Thisboundary isfurther confirmed bythe
fact thatthemarginalproduct curveintersectswiththeaverageproductcurve.Themarginal
physical product curve falls below zero beyond six doses, being the boundary between
Stages2and3. Therational range,therefore,isnarrow inthiscaseandincludesfive andsix
dosesonly (Stage2).
Table 2.2 Hypothetical response to anthelmintic dosing in growing cattle

Number Total physical product Average physical Marginal physical
of doses (kg of weight gain) product (kg per dose) product (A kg / Adose)
0 0 0
10
1 10 10
20
2 30 15
30
3 60 20
40
4 100 25
30
5 130 26
20
6 150 25
-10
7 140 20
-20
8 120 15
2.3.2 Costfunctions and economic choice

Cost functions are closely related to production functions. They take into account an
additional step and include thecost of the variousinputs in the input-output relationship.
Thetotalcostcurvesrelated totheclassical production function of Figure2.3are shownin
Figure2.4.
As shown inFigure 2.4,cost curves aredepicted with the cost onthe vertical axis and the
amount of output onthe horizontal one (notice that the latter wason the vertical axis with
the production function in Figure 2.3). Therelationships for total variable cost (TVC),
totalfixedcost (TFC) and total cost (TC) aregiven by the following equations (with Pxj
beingthe inputprices):
TVC= P x l X l
n
TFC =lP y i Xi
i=2"
n
TC=TVC+TFC=XPviX:
i=l X1 '
Notice thecorresponding relationship between the production function (Figure 2.3) and
the total variable cost curve (Figure 2.4).Output inFigure 2.3 grows at an increasing rate
until output level a is reached. The total variable cost curve in Figure 2.4 increases ata
decreasing rate within the same range of output. Within Stage 2(output level bto output
19
Chapter 2
O
O
a b c '
Figure 2.4 Total cost functions (identifying 3stages of production)
levelc),totaloutput isincreasingatadecreasing rateandtotalvariablecostsarerising atan

increasing rate. The total cost curves become vertical at output c,the boundary between
Stages 2and 3.The vertical curvereflects the fact thatcost continues to increase while the
addition tooutput iszero.Total variablecosts andtotalcosts would continue toincrease as
the output level declined, resulting intotalcost andtotal variable cost curves tobend back
to the left asthey increase. The shape reflects the irrationality of producing in Stage 3.
Higher cost levels would be incurred for production of an amount of output equal to that
inStage2.
The average and marginal cost curves for the classical production function are shown in
Figure 2.5.The relationships for the average fixed cost (AFC), average variable cost
(AVC),average total cost (ATC) and marginal cost (MC) are given by the following
equations (with Pxj beingthe inputprices):
AFC= TFC/Y
AVC=TVC/Y =P x l X 1 / Y = P x l / A P P x l
ATC=AFC+ AVC
MC=ATC/AY=P x l AX! /AY=P x l / MPP x l
20
Economicdecision making inanimal health management
O
o
a b e
Figure2.5Averageandmarginalcostfunctions
Theminimum averagevariablecostoccurs,ascouldbeexpected, attheoutputlevel having

themaximum average physicalproduct, theboundary between Stages 1and 2 (indicated
by output level b).Marginal cost isat aminimum wheretheMPP x j ismaximum - output
level ain Stage 1 ofproduction.Marginalcostincreases whenMPP x j declines.Itisequal
to average variable cost at theboundary between Stages 1 and 2,where APP x j = MPP x j.
WithinStage2netreturnswillbeincreased (orlossesreduced)byusinghigherlevelsofthe
variable input as long as the marginal cost is lower than the output price (MC<PV). The
simplelogicisthateachadditionalunitofoutputproduced addsmoretogrossreturnsthan
to cost when MC<Py. Profit, therefore, ismaximized where marginal cost and returns
areequal (in Stage2).
It is of interest to notice that various cost-minimizing rules are unlikely to lead to
profitable outputlevels.Forexample,aruletominimize averagevariablecost wouldresultin
selecting theinputlevelbattheboundarybetween Stages 1 and2.IfP y isgreaterthanMCat
thislevel,profit canbeincreasedbyoperatingatahigheroutputlevel.Intheevent P v isless
thantheminimumAVC,losseswillbeminimized(ie,reducedtoTFC)byceasingproduction.
21
Chapter2
That will make the supply curve for afarm identical to the marginal cost curve for all
values of prices thatexceed average variable cost.
The cost calculations are illustrated in Table 2.3 using the data from Table 2.2 on the
hypothetical response to anthelmintic dosing in growing cattle.Fixed costs per head are
assumed tobeUS$100,andinput price US$10perdose.
Table 2.3 Production cost derived from the production function on the hypothetical response
to anthelmintic dosing in growing cattle
X1 Y TFC TVC TC AFC AVC ATC MC
doses kg S/head S/head S/head S/kg S/kg S/kg S/kg
0 0 100 0 100 — — —
1.00
1 10 100 10 110 10.00 1.00 11.00
0.50
2 30 100 20 120 3.33 0.67 4.00
0.33
3 60 100 30 130 1.67 0.50 2.17
0.25
4 100 100 40 140 1.00 0.40 1.40
0.33
5 130 100 50 150 0.77 0.38 1.15
0.50
6 150 100 60 160 0.67 0.40 1.07
7 140 100 70 170 0.71 0.50 1.21
8 120 100 80 180 0.83 0.67 1.50
The values in Table 2.3 are calculated using the equations presented before. Average
variablecosts(AVC)areminimalwithfivedoses(US$0.38/kg).TheoutputpriceP y (ie,the
so-called marginal return),therefore, should notbe lessthan US$0.38/kg, otherwise losses
will be minimized (ie,reduced toTFC) by ceasing production. Ahigher price will make
six doses the optimum. More than six doses are not an option because of the negative
marginalresults.Thesefindings are in agreement withTable 2.2,where five and six doses
were found toform therational range (ie,Stage2).
liUMJ
You canpractise the principles of aproduction function, asdiscussedin this chapter, with the
spreadsheet example in Chapter 19:the farm advisory case.The effects of veterinary services
on the number of piglets weaned on asow farm are shown in aproduction function. You have
to calculate the different cost functions and to find the economically optimal amount of
veterinary input. Sensitivity analyses are done to show the effect of changing prices. This
exercise takes about 45 minutes. A smaller example with real experimental data on
anthelminthics in ewes can give you an indication of how this theory isused in research: you
have to find the optimal treatment for this disease. Thisextra exercisetakes about 30 minutes.
2.3.3 Further applications

In considering the production and cost function approach, it was assumed that only one
control measure (ie,input) was varied, and all other aspects were held constant. However,
inreality various different control measures areusually available and it isnotjust amatter
22
of deciding with what intensity each individual control measure will be applied, when the
intensity of the other ones isheld constant. Itis necessary toface thequestion of deciding
the optimum combination of twoor moremeasures aswell.
Theoptimumcombination oftwoinputscanagainbefound byusingthemarginal principle
- the optimum point iswhere the reduction in cost by eliminating oneunit of input A(eg,
teat dipping in mastitis control) equals the cost of the additional amount of input B (eg,
dry-period therapy in mastitis control) tokeep the output (eg,milk production) constant.
Just asan optimum combination of twoinputs can be found, it ispossible tocalculate the
best combination of alarger number of inputs in asimilar way.Theconcept is simple,and
formally named theequimarginal principle:
The returns from a scarce or limited resource are maximized when the input is
allocated toits most profitable uses in such away that the returns from the last unit
of resource is not only equal or higher than thecosts of the last unit of resource,but
also thesame ineach of the alternative uses.
In this way funds will be spread among uses according totheir marginal returns (which
will of course decline progressively as more funds are invested in a single item). This
principle is easy to understand and touse; and is a very powerful economic tool. Yet all
too often decisions in animal health management (and elsewhere) are not made in
accordance with this principle, either because the information does not exist or because
farmers and advisers donot know of it.Itis achallenge for both veterinarians and animal
health economists to make proper estimates of marginal cost and returns from disease
control measures.Oncetheseestimatesareavailable,calculationscaneasilyberedonewith
otherinputvaluestohelpdeterminetheimpactofuncertainestimatesontheoutcome ofthe
decisions (aso-called sensitivityanalysis).
Thereisawiderangeoftechniques availabletohelpperform theseanalysesfor twoormore
measures andfor morerealistic andcomplicated situations.Bothbasic methods (ie,partial
budgeting,cost-benefit analysis,decision-tree analysis)and advanced techniques (ie,linear
programming, dynamic programming, Markov chain simulation, Monte Carlo simulation)
arediscussed and illustrated inthe following chapters.
References
Boehlje,M.D.& Eidman,V.R., 1984. Farmmanagement.JohnWiley& Sons,NewYork,806pp.
Dijkhuizen, A.A., 1992.Modelling animal health economics. Inaugural speech, Wageningen

Agricultural University,Wageningen,28pp.
Howe,K.S.&Mclnerney,J.P.(eds),1987.Diseaseinlivestock:economicsandpolicy.EUR11285
EN,Commission oftheEuropeanCommunities,Brussels, 190pp.
23
3
Basic methods of economic analysis
R.B.M. Huirne & A.A. Dijkhuizen

Department of Farm Management Wageningen Agricultural University, Wageningen, the
Netherlands
Objectives
Fromthischapter thereader should gainknowledge of:
• theneed for farm accounting systems
• theconcept of farm enterprise budgets
• thebasiceconomic methods:partial budgeting,cost-benefit analysis anddecision analysis
3.1 Introduction
In Chapter 2 it was stated that the application of veterinary services is rarely an all-or-
nothing affair. Usually severalprogramsormeasures areavailable,each ofthemoffering a
different degree of protection and requiring a different level of investment. The basic
economic principle for determining the optimal level of input is called the equimarginal
principle:theinputshouldbeallocatedtoitsmostprofitable uses,suchthatthereturns from
the last unit (marginal returns) is notonly equal or higher than the costs of the last unit of
resource (marginal costs),but alsothesame ineach ofthe alternative uses.
Theprinciple issimple,but itsapplication becomes morecomplicated whenthenumberof
inputstodecideonandtherangeofoptionstochoosefrom increase.Methodsareavailable,
however, tohelp tocarry out these more complicated analyses.In thischapter some basic
methods are presented, including partial budgeting, cost-benefit analysis and decision
analysis.More advanced methods follow in Chapters 5to 9.All these methods make use
of information, and that is why the need for farm accounting systems is discussed first.
Furthermore,theconceptofenterprisebudgetsandgrossmarginanalysisisintroduced.This
isbecause thebasic economic methods areusually applied toonly apart of the farm, ie,to
a single enterprise.
3.2 Theneedforfarmaccountingsystems
Accurateandefficient decisionsonanimalhealthmanagementrequireextensive information.
Someofthisinformation canbeacquiredfrom farmrecords,whileotherdatamustbeobtained
from firms with which the farmer deals,or other public and private agencies (Boehlje &
Eidman, 1984).Recordkeepingandaccountingcanbetedious,complexandtime-consuming.
However, it can alsobeveryrewarding when itprovides theessential data for performance
evaluation andassessment ofprogressthatareimportant inmanaging animalhealth.
25
Chapter 3
While there are many reasons for keeping farm accounts, the use of accounts in animal
healthmanagement canbesummarizedundertwoheadings:(1)toprovidedatafor forward
planning,and(2)tohelpcontrol the operation.
Farmaccountscanprovidedataonproduction levelsoflivestockenterprises,theamountof
inputs used, the prices paid for inputs,and the costs and returns of (animals in) individual
enterprises. Recordscanalsobesummarized toindicate the costs andreturnsonamonthly
basis.The data can be used for developing both short-run and long-run plans for animal
health management. The data are unique to the individual business. Farm and enterprise
planningtypicallyrequiresthatthedataavailablefrom previousyearsbesupplemented with
additional data on expected prices, input requirements and production levels for some
possibledecisions.Nevertheless,thedataavailablefrom thepastprovide astartingpoint for
theplanning procedure (Boehlje &Eidman, 1984).
Farm managers develop, on their own or together with their veterinarian or extension
worker, operational (short-term), tactical (medium-term), and strategic (long-term) plans
(Figure 3.1), which usually include animal health plans. After such plans have been
developed, the managers are concerned with implementing them, with monitoring and
controlling the actual outcome over time, and with making adjustments in the plan if
conditions change. In this way farm management is considered a cyclical process, as is
outlined inFigure 3.1 (Huirne, 1990).
Strategic Planning
Tactical Planning
Operational Planning -<-
Plans Analysis
Implementation
Control
Figure 3.1 Themanagement cycle
In developing plans for theenterprise, the farmer sets physical and financial standards of
performance. Accounting systems can be developed to record data on the physical and
financial performance measuresthathavebeen setfortheenterprise.Thesedataprovidethe
farmer with anopportunity tocompare the actual outcome with theperformance standards
(Huirne et al., 1992). It is not unusual to set standards that are financial in nature.
Farmersprepareprojected costsandreturnsona,forinstance,monthlybasisfor thecoming
year and compare the actual costs and returns with the projections that have been made.
26
When asignificant difference between planned and actual costs or returns occurs, thiswill
immediately be clear tothe farmer. This gives farmers the opportunity to take corrective
actions before a serious economic problem can develop. In the development of longer-
term plans, standards are set at the rate of return on investment and the rate of return on
equity capital on ayearly basis (Boehlje &Eidman, 1984).
3.3 Enterprise budgets in gross margin form

Most farmers are in business to make a profit. The simplest and quickest method of
calculating farm profit is to work out abudget along the lines of conventional costs and
returns. This can be valuable because itcan serve as aninitial testof farm profitability. It
omits so many details, however, that it is virtually useless for more accurate control. The
biggest shortcoming of thisapproach isthatittreatsthebusiness asasingle,homogeneous
unit, whereas most farm businesses can be seen as combinations of enterprises. An
enterprise is adivision of thebusiness,usually identified by the type of product (Warren,
1986),for example,crops,swineanddairyherd.Inplanning andcontrollingthebusiness,it
isvital tobeable tomonitor each oftheenterprises individually.
For the purposes above, a method of budgeting for profit which provides details on
enterprisesbutbypassesthedifficulties ofallocatingoverhead costsisrequired.Itmustalso
avoidconfusion betweenthosecostswhichvaryasaresultofachangeintheenterprise,and
those which donot.Onesuchmethod ispreparation of budgets ingross margin form.
With this method, only certain costs are allocated to individual enterprises, the so-called
variable costs.Avariablecostisacost that satisfies the following criteria (Warren, 1986):
(1) it tends tovary directly with small changes in the size of the enterprise, and (2) itcan
relatively easily be allocated toa specific enterprise. Any cost which does not satisfy both
of these criteria is termed afixed cost. Usually noattempt is made to divide such acost
among the various enterprises.
Table3.1 Examplesof variableandfixedcosts

Variablecosts Fixed costs
Veterinary services andAI Regular labour

Feedstuffs (including forage) Power andmachinery running costs
Fertilizers (except contract hire)
Seeds Machinery andbuilding depreciation
Sprays Rent and/or landowning costs
Casual labour Interest charges
Contract hireof machinery
Thecosts of veterinary services and artificial insemination (AI)can easily beallocated toa
dairy herd enterprise, and will vary with small changes in the size of the enterprise.
That is why they are called variable costs.The cost of diesel fuel used in drilling wheat,
for instance, will vary with enterprise size,but will be difficult to allocate without very
27
Chapter 3
detailed recordings (machines areused in otherenterprises aswell). It isthus classified as

afixedcost.Alist of assorted variable andfixedcosts is shown inTable3.1.
Aprofit budget in gross margin form isbuilt up as follows: for each enterprise, variable
costs are deducted from enterprise output to give the enterprise gross margin. The gross
marginsofthevariousenterprises areaddedtogiveatotalgrossmargin.Fromthisthe fixed
costs of the entire business are deducted, resulting in the net profit for the business asa
whole (seeFigure 3.2).
Enterprise 1 Enterprise 2 Enterprise 3

Output Output Output
minus minus minus
Variable costs Variable costs Variable costs
equals equals equals
Enterprise Enterprise Enterprise
grossmargin grossmargin gross margin
I I
Totalgrossmargin
minus
Totalfixedcosts
equals
Net profit of entire business
Figure 3.2 Profit budget in grossmargin form (derived from Warren, 1986)
3.4 Partial budgeting

If the proposed analysis concerns a simple economic comparison of disease control
measures on afarm, and the outcome does not involve a specific time pattern nor a high
degree ofuncertainty, then partial budgeting is the method of choice. Partial budgeting is
simply a quantification of the economic consequences of a specific change in farm
procedure,eg,aherd healthprogram. Itisclosely related totheenterprise budget in gross
margin form described in the previous section. Partial budgets are used to estimate the
change that will occur in farm and enterprise profit from some change in the farm or
enterprise plan by considering only those items of returns and costs that change. Partial
budgets donot calculate the total income and the total expense for each of the plans,but
list only thoseitems ofreturns andexpensesthatchangetoestimate thedifference in profit
expected from theplans.
Partialbudgetingisparticularly useful for analysingrelatively smallchangesinthebusiness
such as considering a shift in the replacement policy of dairy cows or a new breeding
method (ie,artificial insemination),or when participating in acertain herd health program.
Thegeneral format for apartialbudget ismadeupof four sections:(1)additional returns:
a list of items of returns from the alternate plan that will not be received from the base
28
Basicmethods of economic analysis
plan,(2)reducedcosts:alistofitemsofcostsforthebaseplanthatwillbeavoidedwiththe
alternateplan,(3)returnsforegone:alistofitemsofreturnsfrom thebaseplanthatwillnot
be received from the alternate plan, and (4) extra costs: a list of items of costs of the
alternateplanthatarenotrequired withthebaseplan.Tousethefour sectionsinaconsistent
manner, the user of thepartial budgeting procedure mustfirstselect oneplan (for instance,
the current one) as the basis for comparison, and the other as the alternative (proposed
change).The change should be adopted ifthe sum of (1) and (2) is greater than that of (3)
and(4).
As an example data were used toquantify the economics of caesarean section for adairy
cow.When represented in apartialbudgeting format they are as follows:
1.Additional returnsresult from heavier weights of calves: US$25
2. Reduced costs include that less feed isrequired because of the drop in milk production:
US$10
3. Returns foregone result from thedropinmilkproduction: US$30
4. Extracosts include cost of surgery and anincrease inculling rate: US$160
Thenetresult (sumof(1)and(2)=US$35minussumof (3)and(4)=US$190) isnegative:

US$-155.This means that caesarean sections as such arenot desirable from an economic
point ofview.Should the calf (orcow) die otherwise, then itsvalue shouldbe included as
additional returns.
As with other models, it is not always possible to identify clearly the returns and costs
associated withthe change inquestion. Many decisions mayberejected or accepted based
onothercriteria.Furthermore,specialattention shouldbepaidtothequestionwhetherit fits
intothetotal farm orenterprise strategy.
The term partial budgeting does not imply that fewer details are required than for atotal
enterprise budget. This is not the difference between the two methods of budgeting; the
difference is the impact of the proposed change on the farm organization. If the proposed
change will affect theentireenterprise (oreventhewholefarm business),atotal enterprise
budget isneeded. Thepartial budget isappropriate when someof thereturns and costs will
remain constant; it involves identifying those returns and costs that will change and the
degree oramount ofchange.
The example on caesarean section mentioned before in this chapter is worked out in more
detail in the computer exercise given in Chapter 19.In this exerciseyou have to calculate the
values of the different sections of a partial budget one by one, and use these to draw a
conclusion. You will go through asensitivity analysisto determine how stable your conclusions
are. Thisexercise takes about 30 minutes.
29
Chapter 3
3.5 Cost-benefit analysis

If the subject of research deals with more long-term disease control programs at regional
or national level, then cost-benefit analysis istypically the analytical structure of choice.
Cost-benefit analysis is aprocedure for determining the profitability of programs over an
extended period of time, ie, sufficiently long so that addition of an extra year does not
materially influence the comparative ranking.There arethree main elements involved: (1)
enumeration of benefits (returns) and costs, (2)determination of the appropriate discount
rate, and (3) specification of adecision criterion.
When the effects of aprogram have been estimated in physical terms, such as a decrease
in production because of adisease, these effects must be translated into economic terms.
Since the time at which costs or benefits occur generally differs between programs or
alternatives,itisimportantthatthesefuture costsandbenefits are'discounted' tomakethem
completelycomparable,whichresultsinthepresentvalueofcostsandbenefits.Thisisdue
to the time preference of money. Abenefit of US$100 tobe received in one year has less
valuetoday than abenefit of US$100received immediately,because of (potential) interest
yields.Theformula usedtocalculatethePresentValue(PV)ofafuture costorbenefit (FV),
whereristhe annual 'interest rate' (in %)and nisthenumber ofyears inthe future is:
PV= FV/(l+r/100) n
The 'interest rate' used in cost-benefit analysis is called the discount rate, since it makes
future values smallerthanpresentvalues.Thehigherthediscount rate,themoreaprogram
with high initial costs and a low level of benefits over a long period of time will be
penalized.Conventionally,thediscountratedoesnotallowfor inflation ofprices,and future
prices arecalculated atcurrent prices rather than inflation-adjusted prices.This avoids the
difficulty of predicting future inflation rates, which would in any case have noeffect on
the real rate of return from the program under consideration. This discount rate used is
therefore theso-called 'realrateofinterest',beingthedifference betweenthemarketrateof
interest and the inflation rate. For example, if the market rate of interest is 9% and the
inflation rate is4%, thereal rate of interest is5%.
After having calculated the - expected - flow of costs and benefits resulting from the
programandallowing forthetimeatwhichtheyoccur,adecisioncriterionmustbeusedto
make a decision. An overall measure of value is required. Three such measures are
commonly used,each of which has specific advantages and disadvantages:
1.NetPresentValue(NPV),whichexpressesthedifference betweenthetotalpresentvalue
ofbenefits andcosts(presentvalueofnetbenefits). Itrepresentsthevalueoftheprogram
attoday's prices.It indicates the scale of the netbenefits, but does not show the relative
sizeof thebenefits andcosts.Expensive programs will tend tohave ahigh NPV,evenif
thebenefits areonlyafew percentagepointsmorethanthecosts.AnNPVofUS$100000
from US$10million benefits and US$9.9 million costs is quite different from the same
NPV from US$1million benefits and US$0.9 millioncosts.
30
Basicmethodsof economic analysis
2. Benefit-Cost Ratio (B/C ratio),which iscalculated by dividing the total present value
ofthebenefits bythetotal present value ofthecosts.Itrepresents therelative size ofthe
costs and benefits. It gives no indication, however, of the scale of investment, which
shouldbeconsidered if alternative projects arecompared. Following theexample under
number 1,the B/C ratios areUS$10 million /9.9 million = 1.01 and US$1 million / 0.9
million =1.11 respectively.
3.Internal Rate ofReturn (IRR),which reflects the interest rate which would make the
totalpresentvalueofthebenefits equaltothatofthecosts;inotherwords,theinterestrate
which would havetobe charged toreducethenetpresent valuetozero.This measure is
useful becauseitiseasilycomparablewith(real)interestratesinalternative applications,
andbecause it avoids the necessity of selecting adiscount rate.The main disadvantage
isthat there is no simple formula, andit can only be calculated by trying different rates
untilthecorrectoneisfound.Insomecases,thereisnoratethatwillsatisfy thecondition,
for example,if the annualcosts neverexceedthe annual benefits.
The following example isto illustrate the cost-benefit approach for avaccination program
(Table 3.2). The monetary values are inmillions of US$ and the annual real interest rate
equals 5%. The NPV of this program turns out to be US$-1.2m (46.8 -48.0), hence a
negative NPV (while the undiscounted benefits exceed the undiscounted costs).The B/C
ratio is0.975 (46.8/48.0), slightly below the required minimum value of one.Finally, the
IRR canbecalculated by iteration asabout 3.7%.
Table 3.2Application of cost-benefit analysis

Discount Undiscounted Discounted
Year factor Costs Benefits Costs Benefits
1 0.95a 27 0 25.7 b 0.0

2 0.91 15 10 13.7 9.1
3 0.86 10 20 8.6 17.2
4 0.82 0 25 00 20.5
total 52 55 48.0 46.8
a 0.95= 1/(1+5/100)!
b 25.7=0.95 x27
One variant of cost-benefit analysis is cost-effectiveness analysis, to be used when the

expected benefits areexcessively difficult toquantify. Itisaimed atproducing the desired
resultatminimumdiscountedcost.Forexample,anextensionprogrammaybeevaluatedby
looking athowmanypeople adoptedthenewtechnology. Preference isgiven to aprogram
that,given itscosts,willbenefit thelargestnumber within thetarget population.
Somebenefits andcostsmay,however,bedifficult toquantify, even inphysical terms.The
satisfaction ofhavingahealthy herd,reducinganimalsuffering andhumanhealthrisks,and
31
Chapter 3
minimising theenvironmental damage caused by useof chemicals against insect parasites

are some examples of such benefits and costs.Although it may notbe possible to include
theseeffects inaneconomic comparison, itisimportant that they aretaken intoaccount by
decision makers.Despite the fact that somecosts andbenefits cannot bequantified, acost-
benefit analysis isuseful in situations in which there aretwoormore ways of achieving a
given objective.
Do the computer exercise on cost-benefit analysis in Chapter 19. With this model you can
practise how to calculate the discount factor to determine the present value of future costs
and benefits. Thisisdone with an example of enzootic bovine leucosis.After the calculation of
the present values, you have to usedifferent decision criteria (ie, NPV,BICratio and IRR) to
draw your conclusion. Subsequently, a calculation isdone with a different interest rate. This
exercise takes about 40 minutes.
3.6 Decision analysis

If there aremultiple possible outcomes of the proposed courses of action and chance isan
important factor in determining which outcome occurs, then decision analysis is the
approach ofchoice.Decision analysis isdenned asany framework or strategy for handling
complex decisions so that they can be more readily evaluated by the human mind. It is
commonly thoughttoincludefourtechniques (Gregory, 1988):(1)mathematical equations,
(2)payoff matrices, (3)process diagrams orprocessflowcharts,and (4)decision trees.
Amathematical equation is an approach that involves the presentation of data on the
decision options, states of nature, probabilities and outcomes in a mathematical form
(equation)andusesmaximizing oroptimizingcriteriainselectingtheactionthat represents
thedecisionmaker'spreference. Forexample,toselectamongthedecisionoptions,Aj, A2,
...,Aj, information maybepresented inthefollowing mathematical form:
Aj =/(A i ,S 1 ,S 2 ,...,S j ,P 1 ,P 2 ,..,P j ,V il ,V i2 ,...,V ij )
where
Aj =decision option (action);
S; =state ofnature;
P; =probability of occurrence of state of nature (S;);and
Vjj =value of outcome for each action and stateofnature.
Assuming that one desires to use the expected monetary value (EMV) as the decision
criterion (see below), then the EMV for each action (Aj) will be:EMV(Aj) =E;(Pj VJ:),
with the highest EMVbeing preferred.
As an example, assume that a farmer wants to know whether it is profitable or not to
inseminate the sows twice during the same oestrus (24 hours after the first insemination)
instead of once.Sothere aretwooptions:
32
Aj =inseminate once
A2 =inseminate twice
After theinsemination, thesowcan beintwodifferent states ofnature:
Sj =pregnant
S2 =notpregnant
Assume further that eighty-three percent of the sows arepregnant after one insemination.
This percentage increases to 86%when the farmer decides toinseminate twice during one
oestrus. Finally assume that all the sows that do not conceive during this oestrus, will
conceive the next time. The cost of delay of conception of one cycle is assumed to be
US$50.Thecost of insemination is US$4per insemination. Now amathematical equation
canbeusedtocalculatewhetherornotthissecondinsemination isprofitable. The selection
criterion istheexpected monetary valueof thecosts:
Aj =EMV (inseminate once; pregnant, not pregnant; 0.83, 0.17; US$4,

US$54)
A2 =EMV (inseminate twice; pregnant, not pregnant; 0.86, 0.14; US$8,
US$58)
Thus, EMVtA,)=Xj(PjV1j) =0.83x4+0.17 x54=US$12.50

EMV(A2) =Xj(PjV2j) =0.86 x8+0.14 x58=US$15.00
Aj, inseminating once,hasthelowestEMV C0Sts ,sothefarmer shoulddecidetoinseminate

only onceper oestrus period. Itis alsopossible tocalculate the break-even point. This is
thepointwhere 'not profitable' changesto 'profitable', soEMV(Aj) isequal toEMV(A2):
EMV(Aj) = 12.50=EMV(A2)=Xx8+(1-X)x58
where
X =proportion of sowspregnant after twoinseminations during one oestrus
The solution of this equation is: X=0.91. So at least 91%of the sows should become
pregnant after twoinseminations during oneoestrustomake this strategy profitable.
A payoff matrix is atabular presentation of data on the decision actions (as presented
above) and provides abetter visual presentation of the data. Thepresentation of data may
taketheform presented inTable3.3.
33
Chapter 3
Table 3.3A payoff matrix

State of Value of outcome (Vjp for Probability of
nature different actions choices (Aj) occurrence
(Sj) AT A2 .... Aj (Pj)
Si vn v21 .... vn Pl
V V V
S2 12 22 •- i2 P2
I I I I I
I I I I I
I I I I I
Sj Vlj V2j •••• Vij PJ
Using some decision criteria, avisual or mathematical computation isthen made to select
thepreferred action.
Amoreconcrete example of apayoff matrix isgivenbelow,inwhich three strategies A,B
andCtocontrolcontagiousdiseaseoutbreaks aredistinguished.Totalpayoff (inmillionsof
US$)ofthestrategies dependsontheregion oftheoutbreakunderconsideration, ie,North,
South,EastandWest, asissummarized inTable3.4.
Table 3.4 Example payoff matrix for contagious disease control

State of nature Strategy A StrategyB StrategyC Probability
Outbreak North 120 80 30 0.1

Outbreak South 110 70 60 0.5
Outbreak East 90 60 60 0.3
Outbreak West 40 50 60 0.1
Aprocessdiagramorflowchartisatechniqueinwhich theselectionprocessispresented
in adynamic sequence of events, information flows, information processing steps and
decision-making steps.This approach is used in computer programming and is gaining
groundindiagnosticworkandareasofartificial intelligence.AnexampleisgiveninFigure
3.3.Indiagnosticwork,thedifferent stagesoftheflowchartbecometheproceduresthatone
goes through in identifying a specific disease.Thusby answering questions related tothe
symptoms of the disease and going through 'yes' and 'no' arrows,one ends upat apoint
where aparticular diseaseis defined.
Decision-treeanalysisisprobably themostfrequently usedtechniqueofdecision analysis.
Adecision tree isdefined as agraphical method of expressing, inchronological order, the
alternative actions available to the decision maker and the choices determined by chance
(Figure3.4).Thefirst stepistoarrangetheproblemsthatmustbesolved andtocharacterize
theinformation needed totranslate the decision into astructure resembling atree. In the
decision tree,choices(Aj) suchaswhether ornottotreat,arerepresentedby squarescalled
decision nodes. Chance events or states of nature (Sj), such asresponse totreatment, are
34
Basicmethods of economicanalysis
Birth
"
Puberty
"
Begin oestrus cycle
"
Mating
1
'
Conception
''
Gestation
*
Parturition
'' i '
Fpmalp nrnsrpnv
retained as rep. acements femal tssol i asproduce
Figure 3.3An example of a flowchart: the lifetime generator (Marsh, 1986)
represented by circles called chancenodes.Lines,orbranches, follow each node and lead

to the next event. The branches following each decision node must include all possible
outcomes,and bemutually exhaustive.
After each chance node,there is aprobability (Pj) that anevent occurs.The probabilities
following achance node must add up to 1.00. These probabilities can be assessed from
literature,experimental data orexpertopinion.Expected outcomes (Vj), usually monetary,
are entered at the far right of the tree branches. In Figure 3.4, the contagious disease
example from Table 3.4ispresented intheform ofadecision tree.
35
Chapter 3
Action Statesof Probability of Value of

choices nature occurrence outcome
Chance 120
node -North- -0.1-
-South- -0.5- 110
—O -East - -0.3- 90
.West^ -0.L- 40
Decision
"North- 80
node
-South-
-o.r 70
B -O -0.5-
G" -East -
-West - -0.3-
60
50
-o.i- 30
-Nortrr
-Soutrr
-o.i- 60
-O- -East - -0.5- 60
-West- -0.3- 60
-0.1-
Figure 3.4A hypothetical decision tree representing action choices(strategies A, B,C), states of
nature (outbreaks in North, South, Eastand West), the associated probabilities and
monetary values of outcome
The choice of preferred action is based on the decision criterion, eg, highest expected
monetary value (EMV).The EMV criterion canbe used tochoose the decision (A w ) that
maximizestheexpected monetary value.Thiscanbedone asfollows: A w =maxEMV(Aj)
= maxIj(Pj Vjj). EMV(strategy A) =0.1 x 120+0.5 x 110+0.3x90 +0.1 x40 =98,
EMV(strategy B)=0.1x80+0.5x70+0.3 x60+0.1x50=66,and EMV(strategy C)=
0.1 x30+0.5 x60+0.3 x60+0.1 x60= 57.This means that strategy Ahas the highest
EMV,andisthepreferred one.
Anotherexample dealswithtreatment ofleft-displaced abomasum, which primarily occurs
inhigh-producing olderdairy cowsthathaverecentlycalved.Right-flank omentopexy, left-
flank abomasopexy, and right-paramedian abomasopexy can all be used astreatments by
skilled veterinarians with high degrees of success.Theclosed surgical techniques of blind
stitch abomasopexy and thebar suture technique areonly slightly less successful. Anon-
surgical method of rolling the cow to effect physical replacement of the abomasum hasa
highrateofrecurrenceofthecondition andalowerrateof recovery,butthismethodmaybe
preferred byfarmers becauseitisnoninvasive andinexpensive (Ruegg &Carpenter, 1989).
Key question is:when are the losses minimal? Decision-tree analysis as atechnique can
helptomakethechoice.Toconstructthedecisiontree,thefollowing assumptions aremade,
namely:
1.Surgery (right-flank omentopexy, etc.) costs the farmer US$215 and closed surgical
techniques USS100.Rolling thecow costs US$60.
2.Losses in case of premature disposal occur when cows are replaced before reaching
their economically optimal age. The extent of the losses highly depends on age and
productive capacity of the cows concerned. For the cows in this example the
corresponding losses are summarized inTable3.5.
36
Basicmethodsof economicanalysis
Table 3.5 Financial losses in case of disposal (US$)

Relative production level (% at Mature Equivalent)
86-90% 98-102% 110-114% 122-126%
First lactation 72 439 833 1312
Fourth lactation 466 1003 1609 2296
3. In case of surgery, milk production is expected to be reduced by 750 kg, which

corresponds to US$315 at a milk price of US$0.42 per kg. Taking into account a
reduction in feed costs because of milk not produced (ie, 375 kg of concentrates at
US$0.22perkg)providesanexpected netlossinmilkreceiptsofUS$315-US$82.50=
US$232.50.Incaseof closed surgery,milkproduction isexpected tobe reduced by 375
kg, because this method isless invasive.Noreduction is assumed incase of rolling the
cow.
4. Cowshavetoberemovedimmediately,shouldsurgerybeunsuccessful. Meatisexpected
tobe condemned because of antibiotics in 50%of thecases, losing the slaughter value
ofUS$800.
Action Statesof Prob. Monetary

choices nature values
-O- Success- -0.90 -> LOD+SV-TrC -milk

Failure- -0.10 A
Decision
node
~6-TZCond-
not—
0.5 -TrCA
-0.5- • SV - TrC,
B -O- Success- -0.85 • LOD+SV-TrCg-milk
Failure- -0.15
-j—Cond-
~~h~T—Cond 0.5—>--TrCß
I—not— -0.5- "SV-TrCß
-O Success- "0.30 -> LOD +SV-TrCc
Failure- -0.70 " • SV-TrCc
D
-•SV
Where
A= surgery;
B = closed surgical technique;
C = rolling the cow;
D= cullingthecow immediately;
LOD = loss incase of disposal;
SV = slaughter valueof thecow;
TrQ = cost of treatment (with i=A,BorC);
milk = net loss inmilk receipts;
Cond = meat iscondemned because of antibiotics;and
not = meat isnotcondemned despite antibiotics.
Figure 3.5 Left-displaced abomasum decision tree
37
Chapter3
5.The recovery rate after surgery is 85%,and after closed surgical techniques this is75%.
Rolling hasarecovery rate of30%.
The tree shown inFigure 3.5 isbased onthese assumptions.

Evaluation of the decision tree is started by calculation of the expected monetary value
(EMV) for each alternative. These values differ with the financial loss in case of disposal.
The outcome is presented in Table 3.6. For each of the different production levels and
lactation numbers, thebest choice of action is underlined.
Forfirstlactation cowsofbelow-average production level,culling turns outtobe the most
profitable option.For anaveragefirstlactation cow and for anoldercow of below-average
production level rolling isthe most profitable action.First lactation cows producing above
averageandoldercowsproducingonaverageorbettercanbestbetreatedbyclosedsurgery.
Surgery isthebest option for older cowswith aproduction level of 122to 126%.
Table 3.6 Expected monetary values (US$) of the different action choices
Choice of Relative production level (% at Mature Equivalent)
action 86-90% 98-102% 110-114% 122-126%
Lad Lac4 Lad Lac4 Lad Lac4 Lad Lac4
Surgery 525 723 701 1180 1035 1695 1443 2279

Closed surgery 600 862 842 1265 1138 1720 1497 2235
Rolling 762 880 872 1041 990 1223 1134 1429
Culling 800 800 800 800 800 800 800 800
Table 3.6 shows that for an average-producing first lactation cow, the EMV of closed
surgery is only slightly lower than the EMV of rolling the cow. A sensitivity analysis
shows that with arecovery rate of 23% for rolling the cow instead of 30%,the EMVs of
both actions would be equal. For an average-producing cow in lactation 4the EMV of
surgery would be equal to the EMV of closed surgery when the recovery rate of closed
surgery equalled 68%instead of 75%.These sensitivity analyses show that theoutcomeof
thecalculations ishighly dependent onthe assumptions made.
EB9E19^
Theexample on left-displaced abomasum discussedabove isworked out in more detail in the
computer exercise in Chapter 19. This example is not built in a spreadsheet format, but in
SMLTREE: a computer program especially useful for building decision trees (but not veryuser-
friendly). You have to build the tree partly yourself, then you can evaluate the tree and do
some sensitivity analyses on the effect of the producing level of the cow, the prices and the
rate of success of the different strategies. Thisexercisetakes approximately 45 minutes.
38

The basic methods described in this chapter include economic techniques that are relatively
easy to understand and apply. Major advantage of these techniques is that they can be
performed both by hand and by computer. Hand calculations are especially effective in
practical situations (ie, in the field) when there is no computer available. Solving realistic
problems by hand with more advanced and complex modelling techniques, such as dynamic
programming, linear programming, Markov chains and Monte Carlo simulation (described
in later chapters), is almost impossible. The basic techniques presented in this chapter,
however, can alsobe modelled very well (within areasonable period of time and without too
much effort) in spreadsheet computer programs. This gives the decision maker the
additional advantage to carry out a sensitivity analysis, in which input variables
(assumptions) of the model are systematically varied over some range of interest to
determine whether and how the outcomes change. Examples of input variable modifications
are interest rates, future price and production levels and probability distributions. With the
insights provided by the sensitivity analysis, the decision maker gets a better understanding
of the problem in hand and of the effects of alternative actions that are available.
References
Boehlje, M.D.&Eidman, V.R., 1984.Farm management. John Wiley &Sons,New York, 806pp.
Gregory, G., 1988.Decision analysis.Plenum,New York, 385pp.
Huirne, R.B.M., 1990.Computerized management support for swinebreeding farms. PhD-Thesis,

Department of Farm Management, Wageningen Agricultural University, Wageningen, 165pp.
Huime, R.B.M., Dijkhuizen, A.A.,Renkema, J.A.&VanBeek, P., 1992.Computerized analysis of

individual sow-herd performance. American Journal of Agricultural Economics 74:388-399.
Marsh, W.E., 1986.Economic decision making on health and management in live-stock herds:
examining complex problems through computer simulation. PhD-Thesis, University of Minnesota,
St. Paul, 304pp.
Ruegg, P.L. & Carpenter, T.E., 1989. Decision-tree analysis of treatment alternatives for left-
displaced abomasum.Journal of American Veterinary Medical Association 195:464-467.
Warren, M.F., 1986.Financial management for farmers. Hutchinson, London, 306pp.
39
Economic impact of common health and fertility
problems
A.A. Dijkhuizen 1 ), R.B.M. Huirne 1 ), A.W. Jalvingh 1 ) &J. Stelwagen 2 )

Netherlands
2) Department of Herd Health and Reproduction, School of Veterinary Medicine, Utrecht, the
Netherlands
Objectives
Fromthischapter thereader should gain knowledge of:
• thefinanciallossesindairycattleowingtoreproductive failure, mastitisandclinical digital
disease
• the way tocalculate theeconomic impact of number of litters per sow peryear, litter size,
feed conversion efficiency, daily weight gain andmortality rateon swine farms
4.1 Introduction
The calculation of financial losses is especially of importance tohelp provide abetter
overall viewoftheimpactofdiseaseandtocontribute toestimatingtheextent ofthelosses
tobe avoided. The latter is particularly the case if adifference in losses among farms is
indicated, in addition to the losses in the average situation. Three questions should be
answered for aneconomic characterization oftheactual situation:
1.Towhatextent doestheprobleminitsvarious forms occur?
2.What arethe quantitative andqualitative effects onproduction, mortality,etc.expressed
inphysical terms?
3. Howcan thesephysical effects beexpressed infinancialterms?
The accuracy of the answers tothese questions -and thus of the economic calculations -
highlydependsontheavailability andusefulness oftheunderlyingdata.Buteven ifenough
data are available,itisnot asimpletasktoquantify the lossesfrom disease,because their
effects:
• arenot always obvious and pronounced;
• areinfluenced byotherfactors such asnutrition and housing;
• have atemporal dimension which adds to thecomplexity of determining their impacts at
different stages intime;and
• often manifest themselves togetherwithotherdiseases.
41
Chapter 4
This may help explain why the outcome of calculations often differs so much, even for
similar farm andpriceconditions.
From amethodological point of view,financiallosses atfarm levelcanbe attributed toone
ormore of the following factors atanimal level:
a. lessefficient production and higher veterinary costs prior todisposal;
b. reduced slaughter value andidleproduction factors at disposal;and
c.lost future income owingtodisposal.
Factor conly occurs when animals have tobe replaced before reaching their economically
optimal age.Thelossisthedifference between (1)theincomethataparticularanimalcould
yieldduringherremainingexpected life,hadthereason for replacement notpresented itself
- given normal probabilities ofdisposal duetootherreasons -and (2)theexpected average
income over the same period of time of replacement animals with normal productive
qualities and normal probabilities of disposal. When calculating the total loss per farm,
factors a,band cmustbe added.
Quantifying theeconomic losses owing to disease is mainly performed by simple partial
budgeting techniques. In the remainder part of this chapter this type of calculation is
illustrated for dairy cattle (ie,reproductive failure, mastitis and lameness) and swine (sow
and pig fattening performance) for typical Dutch conditions. The approach is general,
however, andcould alsobeused for otherfarm andprice conditions.
4.2 Applications in dairy cattle
4.2.1 Reproductive failure

Underlying reasons for reduced reproductive performance indairy herds may range from
infertile cows to inadequate management practices.Economically speaking, such reasons
eventually lead to either a longer calving interval or premature disposal. Hence,
economic calculations should includeboth these factors.
Calving interval
Theissuesofoptimalcalving intervalsandtheeffect ofachangeincalvinginterval (ordays
open)ontheeconomicperformance ofcowshaveoften beendiscussed.Whilesome studies
have found short intervals of 310 to 340 days to be optimal, others have indicated
intermediate optima between 370 and 400 days. One reason for the different results in
these studies may be the difference in criteria used (eg, milk production only versus a
comparison on total net return) and the different price and production conditions under
consideration. Also, in some field studies the average effect for all cows is presented,
whereas others distinguish between cows that differ inage and calving season. Moreover,
the losses because of extended calving intervals are sometimes wrongly combined with
those from premature disposal, which also affects theresults.
Foravalideconomicevaluation,insight isrequiredintotherelationship-onaper-cowbasis-
betweenthelengthofcalvingintervalandtheresultingnetreturnperunitoftime(day,year).
42
Economic impact of common health andfertility problems
Takingayearasthemostcommonbasis in incomecalculations,total net return percalving

interval (TNRj) shouldbemultiplied by365/Lj, whereLjrefers tothelength(indays)ofthe
calving interval i concerned. The calving interval with the highest yearly net return
(Max[TNRj x365/Lj]) is defined asoptimal, while the difference with every other calving
interval indicates the loss in income per cow per year. These differences can only be
influenced by those revenues and costs which arenot proportional tothe length of calving
interval.Three categories arecommonly considered (Jalvingh, 1993):
net milk receipts;
calf sales;and
other components.
Eachof theseisdiscussed andillustrated for herd conditions asdescribed inAppendix 4.1.

Standard lactation curves of daily milk yields (kg) for individual cows have a downward
slopefollowing peakproduction.Theincreaseintotal lactationmilkproduction withlonger
calving interval,therefore, islessthanproportional. Total increase isfurther diminished by
anincrease indaysdrywithlongercalving intervals.Moreover, pregnancy usually reduces
milkyieldbeyondaboutfour monthsafter conception.Asanexample,resultsare presented
inTable 4.1 for third lactation cowswith averageproduction level.
Table 4.7 Milk yield for third lactation cows

Calving interval (months) 12 14 Difference
Length of lactation (days) 305 345 + 40

Length of dryperiod (days) 60 80 + 20
Milkyield perlactation (kg) 7397 7979 + 582
Milkyield peryear(kg) 7397 6853 - 544
As indicated in Table 4.1, lactation length increases by 40 days and the dry period by 20
days with acalving interval that istwomonths longer. Total lactation milk yield increases
by 582kg,which equals 582/60 =9.7 kgper additional day of calving interval. However,
this increase is considerably less than the average production of 20.3 kg per day with a
calving interval of 12months. So, annual milk yield decreases by 544 kg (ie. 7.4%) or
544/60 =9.1 kg per additional day of calving interval. At amilk price of US$0.42 perkg,
therefore, the average loss amounts toUS$3.82 per day. However, aconsiderable part of
these lossesiscompensated for bythree interrelated factors:
higher percentage of fat andprotein intheextra milk yield;
lower total feed costs;and
positive effect onmilkyield inthe subsequent lactation.
In contrast tothe downward slope of the milk yield curve (kg),the percentages of fat and
protein increase towards the end of lactation. Thus, the fat and protein percentages in the
extra milk yield with lengthened calving interval are relatively high. This is an important
43
Chapter 4
consideration if the milk price is dependent on fat and protein contents (as is the case in
many countries). Feed requirements percow depend, among other things,on age,level of
milk yield, percentages of fat and protein in themilk and livebody weight. Consequently,
total feed costs decrease withdiminishing annual milk yield. Ontheotherhand, feed costs
increase with calving interval because of the increase in live body weight. Finally, the
increased dry period and associated higher livebody weight withlongercalving interval is
assumed tohavea slightly positive effect on milk yield in the subsequent lactation. This
leads to a difference in net milk receipts (calculated as the margin between gross milk
receipts and feed costs),asispresented inTable4.2.
Table 4.2 Losses in net milk receipts per cow per year (US$)a
Calving interval (months) 11 12 13 14 15 16 17
Lactation 1 :i 0 13 42 81 123 169

Lactation 2 l 0 36 91 152 219 288
Lactation 3 0 17 72 144 223 307 393
Lactation 4-5 0 19 76 152 234 321 409
Lactation 6-8 0 20 77 152 233 319 408
Lactation >9 0 18 73 145 223 306 392
Averagecow 0 3 43 101 167 237 309
a
Thecalving interval withhighest net milkreceipts isset atzero
Taking into account net milk receipts only,the optimal calving interval for first lactation
cows is one year. For older cows the optimal interval is shorter than one year, while the
loss duetoalongercalving interval ismuchhigherthan forfirstlactationcows.
It is obvious that the number of calves born per year will decrease with longer calving
intervals. With acalving interval of 11months, for instance, theoretically 12/11= 1.09
calves are born per year versus 12/17 =0.71 with acalving interval of 17months. These
differences are slightly reduced when taking into account a-fixed -percentage for calf
mortality. Nevertheless,considering calf salesonly,theshortest calving interval is optimal
for both first lactation and oldercows.
Labour costs per year will slightly decrease with longer calving intervals because of, for
instance,fewer milking daysand number ofcalvesborn. Othercomponents tobe included
involvecostsofinsemination andveterinary treatment.Theirrelationshipwiththelengthof
calving interval, however, highly depends on the underlying causes of the problems (eg,
poor oestrus detection versus retained placenta and/or metritis). It is considered more
appropriate, therefore, toexclude the costs of insemination and veterinary treatment from
the more general type of calculations with respect tocalving intervals as such and add
them separately perfarm as additional costsduetoreproductive failure.
The final economic comparison of calving intervals should be based on the combined
44
Economic impact of commonhealth andfertility problems
outcome of the three categories considered (net milk receipts, calf sales and other
components).Theresults aresummarized inTable4.3.
Table 4.3. Optimal length of calving interval and calculated lossesper cow per year (US$)
Lactation 1 7 0 26 66 113 163 217

Lactation 2 0 17 68 136 208 284 362
Lactation 3 0 36 106 297 282 376 471
Lactation 4-5 0 38 111 199 293 390 487
Lactation 6-8 0 38 111 199 292 389 486
Lactation >9 0 36 106 192 282 375 470
Average cow 0 20 75 146 222 301 382
Per day longer calving interval for anaverage cow:

Per average day - 0.67 .25 1.62 1.85 2.01 2.12
Permarginal day - 0.67 .83 2.37 2.53 2.63 2.70
If all relevant factors areconsidered, theoptimal calving interval forfirstlactation cowsis

still exactly one year.For older cows the optimal interval is shorter than one year, while
the lossdue toalongercalving interval ismuch higher than forfirstlactation cows.Foran
average cow it is also apparent that the average loss per day increases from US$0.67
(20/30) with acalvinginterval of oneyeartoUS$2.12 (382/180) with acalving intervalof
17months.Thus,thecostsofeachdayofincreased calving interval arenotuniform, which
is also shown by the marginal loss perday. Lengthening the optimal calving interval by
one month causes alossof US$0.67 ((20-0)/30) perday,which increases toUS$1.83((75-
20)/30) per day when lengthening from 12to 13months, while the loss due to a further
lengthening amounts toUS$2.37 to2.70perextraday.
Theoutcome ofthecalculations ontheeconomicsofcalving interval is found tobe notvery

sensitive tochanges inmajor input factors such as milk price, value of calves, production
level and production effect in subsequent lactations.In contrast, achange in shape of the
lactationcurvehasaverystronginfluence.A 10%higherpersistency(ie,areduceddownward
slopeafter peakproduction)leadstoadecreaseof25to50%inloss,withtheoptimal interval
increasingfrom 11 to 12months.A 10%lowerpersistencyincreasesthelossby25to50%:then
themarginal lossbeyond400daysamountstoalmost USS3.50perday.Month ofcalvingis
another factor with asignificant impactontheeconomics ofcalving interval,atleast ifprices
for milkandcalvesshowseasonality.ForDutchconditions thesepricesarehighest inautumn
andwinter.Lossesbecauseofextendedcalvingintervals,therefore,arehigherforcowscalving
intheseseasonsthan for cowscalving inspring and summer,asisshowninTable4.4.Inthe
lattercasesthetimeofcalving(s) isshifting towardsamoreprofitable season.
45
Chapter 4
Table 4.4 Optimal length of calving interval and calculated lossesper cow per year (US$) for an
average cow with different months of calving3
Month of calving
- February 0 48 120 158 194 271 347
-May 10 0 57 128 197 239 285
- August 0 8 23 58 146 281 407
- November 0 32 141 258 365 468 519
a
Assuming subsequent calving intervals tobe 12months
Premature disposal
The annual culling rateoncommercial dairy farms is,on average, about 30to35%,nearly
one quarter of which is due toreproductive failure. In quantifying the losses owing to
premature disposal, special attention hastobepaid tofactors associated with age(eg,milk
receipts, value of calves, slaughter value of cows, feed costs andprobabilities of disposal)
and tothe costs of replacement heifers1. The extent of these losses is strongly influenced
by the age and relative production level of the cow under consideration, ranging from
about US$60 for low-producing cows (80-85% at Mature Equivalent) to more than
US$1400for high-producing youngcows(about 125%atMatureEquivalent).Theaverage
loss per cow culled owing toreproductive failure was determined tobe US$220 to 280,
which is much lower than disposal for several other reasons.This isbecause these cows
can finish theirfinallactation inanormal way andtheir slaughter value remainshigh.
Total reproductive lossesper farm

Assuming a typical Dutch herd with an average calving interval of about 380 days
(Appendix 4.1), the distribution of cows over the various classes of calving intervals
considered inTable4.3is36%,28%,17%,10%,5%,3%and 2%respectively.Taking into
account the calculated losses for an average cow,total annual losses of the 380-day herd
calving interval average 0.36 x0+0.28 x20+ +0.02 x382=US$61per cow.About
80% of the cows calve in ayear, making the losses onherd basis equal to0.80 xUS$61=
US$49percow peryear.Moreover, 6to7%of allcows areculledbecause of reproductive
failure, resulting in atotal loss of USS16percow per year (ie,0.06 to0.07 multiplied by
US$220 to 280).Finally, some other costs will turn up,depending onthe cause(s) of the
problems (eg, additional costs of insemination and veterinary services). So,in total the
annualcostsofreproductivefailure willaverageaboutUS$80percowperyear,orUS$3600
for a45-cow herd. This corresponds to 2%of gross return and 10%of the farmer's net
return tolabour andmanagement (Appendix 4.1).
The methodology underlying these calculations isexplained in Chapter 7.
46
Economicimpact of commonhealth andfertility problems
4.2.2 Mastitis
Mastitis isgenerally considered adisease of major economic importance indairy cows.In
theliterature,theoutcomeofcalculationsoflossesattributedtomastitisdiffer considerably,
depending on the method used, the sources of losses included and the origin of the data.
Consequently, thoseresults should beinterpreted withcare.
Most frequently, economic calculations on mastitis losses are based on annual herd
parameters ratherthanondaily cowperformances. Previously, thenumber of somatic cells
in milk was used as amajor criterion for estimating the presence and severity of mastitis.
There is anon-going discussion, however, whether thiscriterion isstill appropriate. Using
pathogens in milk as adiagnostic criterion seems tobe more preferable. Four different
typesof pathogens areespecially of importancetobeconsidered: coliform, streptococcal,
staphylococcal and Corynebacteriumpyogenes. Additionally, there may beclinical cases
inwhich nopathogens canbedetected,usually defined asbacteriologically negative.
Theeconomic effects ofmastitiscanbedivided intothreecategories (Houben, 1995):
• reduced milkreceipts;
• costof treatment; and
• premature disposal.
No single setof published data isavailable toquantify these effects. Therefore, they have
to be derived from various sources. These data are summarized in Table 4.5 for Dutch
conditions,andfocus onso-called clinicalmastitis.
Table 4.5 Major input data for infections with clinical signs
Infected Annual milk Annual
quarters decrease per culling
3
Type of pathogen Frequency per case quarter (%) rate(%)
Streptococcal 10.8 1.3 22 10

Coliform 7.0 1.1 17 14
Staphylococcal 3.0 1.4 26 14
C. Pyogenes 1.6 1.1 48b 80
Bact. Negative 5.6 1.3 21 12
Total/Average 28.0 1.3 23 14
a
Percentage cow casesperyear
" Next lactation
AsshowninTable4.5,thetotalfrequency ofclinicalmastitisisestimatedtoaverage28cow
cases per 100cows per year, with 28x 1.3 = 36 quarters being involved. Streptococcal
infections appeartobethemostfrequent. Theestimated decreaseintotalmilkproduction is
taken tobe 23%, ranging from 17% for coliform to48%for Corynebacterium pyogenes.
47
Chapter 4
Fatcontent of milkisassumedtobereduced byover4%.Foreachkgofmilk notproduced

a saving of 0.5 kg of concentrates is taken into account. Treatment costs areconsidered to
include veterinary fees, drug expenses and farmer's labour. Milk from cows treated with
antibiotics will not be delivered to the factory for five days,but fed toyoung calves.This
reduces the losses from otherwise discarded milk. Table 4.5 shows that, on average, 14%
of the cows with clinical mastitis are culled. Corynebacteriumpyogenes ranks by far the
highest with aculling rate of 80%. The average loss per cow culled owing to mastitis is
assumed tobeabout US$250,whichequalsthelosspercowculledfor reproductive failure.
Finally,per yearfive cows (ie, sixquarters) in a45-cow herd have infections without any
clinical signs, 60% of which are caused by streptococcal and 40% by staphylococcal
bacteria.Lossesarerestricted tomilkreduction (4.6%perlactation)andfatreduction(1.9%
per lactation). Mastitis without clinical signs is difficult to detect. Therefore, neither
treatment costs nor premature disposal are included in the calculations. The calculated
annual losses owing tomastitis,based on all these assumptions, are summarized in Table
4.6.
Table 4.6 Calculated annual losses due to mastitis (US$)

Per infected cow Total per
Type of With Without average cow
pathogen din. signs din. signs inherd
Streptococcal 296 25 35 ( 40%)

Coliform 240 - 17 ( 19%)
Staphylococcal 337 41 14( 16%)
C. Pyogenes 349 - 6 ( 7%)
Bact. Negative 284 - 16( 18%)
Total/Average 517 57 88 (100%)
Per clinically infected cow, the Corynebacteriumpyogenes pathogen causes the highest
losses, especially because of its extremely high culling rate. Staphylococcal infections
rank second, duetoacombination ofarelatively highnumber of infected quarterspercase
and aconsiderable loss in production. Infections without any clinical signs are,from an
economic point ofview,far lessimportant. At farm level streptococcal infections have the
greatest economic impact, ie,40%of total losses,while Corynebacteriumpyogenes ranks
lowest. The differences incosts per case areoffset by differences infrequency rates.Total
losses per farm average US$88 per cow per year (or about US$4000 for a45-cow herd),
which equals approximately 11% of farmer's net return to labour and management
(Appendix4.1).Reduction inmilkandfatproduction accountsfor 70%oftheselosses, 18%
of which owing totreatment and 12%caused bypremature disposal.
48
4.2.3 Clinical digital diseases

Calculations on the economics of lameness in dairy cattle are sparse,because there isa
serious lack of data onbothfrequency andeffects ofthedisease.Available research for the
Netherlands showsthatin21% ofthelactationsoneormorecasesofclinicaldigitaldiseases
arediagnosed.Twenty-eightpercent oftheaffected cowsarereplaced,whichmakeup7.6%
of allcows culled. Losses areexpected toinclude:
• reduced milkreceipts;
• longer calving interval;
• treatment costs;
• extralabourinputbythe farmer;
• premature disposal; and
• reduced -energy -efficiency duetoweight fluctuations.
Reduction inmilkyieldturns outtobelimited,butvarieshighly between cows that arenot

culled and cows that areculled because of digital diseases. Culled cows have considerably
and significantly lower milk,fat and protein productions (Table4.7).
Table 4.7 Production data and calving intervals of cows with clinical digital diseases, divided
into cows culled and not culled
Lossof production (in %) Longer calving
milk (kg) fat (kg) protein (kg) interval (days)
cows culled 11.3% 14.1% 16.3% —

cowsnot culled 0.8% 1.1% 1.1% 9.0
Itisalso shown inTable4.7thatcows withdigital diseaseshaveonaverage a9-daylonger

calving interval: 385.5dayscompared with 376.5 daysfor cows without digital diseases.
Considering treatment costs,itisknown that 60%of thecows withclinical digital diseases
receive veterinary treatment. Farmer's additional labour input required for cows with this
type of problems isestimated tobe slightly more than 30minutes per lactation. Assuming
that this time could have been used alternatively, opportunity costs aretaken into account
inthecalculation of thelosses.
Lossesduetoprematuredisposalconsistoflossofslaughterweight andcarcassquality,loss
offuture incomeandlossesassociatedwithidleproduction factors.Thewaytheselossesare
calculated isdiscussed indetailinChapter 7.
Quite often, lameness resultsin loss of body condition, because thecow isnot able totake
in therequired amount of energy for maintenance and production. This loss of live weight
ofcowswithclinicaldigitaldiseasesamountsto3to5%ofthetotalliveweight.Moreover,
the maintenance requirement maybeincreased duetoimmune responses.
Combining these assumptions provides an estimate of the losses,as summarized in Table
4.8.Total losses amount toalmost US$30percowperyear,ranking third after mastitis and
reproductive failure.
49
Chapter4
Table 4.8Average annual losses owing to clinical digital diseases (US$)

Percase Per cow present in herd
Reduced milkreceipts 36 8
Longer calving interval 16 3
Treatment costs 12 3
Extra labour inputbythefarmer 17 4
Premature disposal 45 9
Weight fluctuations 1
Total 127 27
4.2.4 Total lossesand differences among farms

Totalcalculated lossesowingtoreproductivefailure,mastitisandlamenessaverageUS$80
+ 88+ 27 =US$195 per cow peryear. Considering other diseases not yet included, total
losses indairy cattle may increaseto-atleast -US$300per cow peryear onaverage.This
corresponds toalmost 10%of gross return and 40% of farmer's net return to labour and
management (Appendix4.1).
Itwill not be possible -and profitable -to avoid all calculated losses.Differences among
farms canhelptogaininsightintowhatisattainableundercurrentconditions. Farm-specific
data suitable for research onanimal health economics are sparse,however. Available data
ondifferences incalvinginterval suggestbigdifferences amongfarms,easilyexceedingthe
calculated average loss.Moreover, thebest 20%of farms prove torealize only half of the
calculated losses on the average farm. So, there is reason to expect that considerable
economic improvement can be achieved, especially for farms with higher than average
losses.
4.3 Applications in swine
4.3.1 Sow performance

Differences among farms
Available data on health and fertility problems in swine are too fragmental tobe included
ineconomiccalculations.Anotherwaytogainmoreinsightintotheir-potential-economic
impact istoanalyse differences inproductive performance amongfarms, the dataof which
are more readily available. In the Netherlands, for instance, sow herds with the best
performances raise more than 23.4 pigsper sowper year, while the 20%with the poorest
results do not exceed 17.8 pigs (Table 4.9). Assuming an average net economic value of
roughly US$45 for each additional pig raised, such adifference corresponds with US$252
persowperyear,whichisevenmorethantheaveragenetreturntolabour and management
on atypical farm (Appendix4.2).
50
Table 4.9 Differences in performance among Dutch sow herds

Performance Five classeswith 20% of farms ineach
indicator Worst Poor Average Good Excellent
Litterspersowperyear <2.14 2.14-2.19 2.20-2.24 2.25-2.34 >2.34
Pigsbornaliveperlitter <10.4 10.4-10.6 10.7-10.9 11.0-11.2 >11.2
Pigmortalityrate >16.5 16.5-14.6 14.5-12.6 12.5-10.6 <10.6
Pigsraisedperlitter <8.4 8.4-9.0 9.1-9.5 9.6-10.0 >10.0
Pigsraisedpersowperyear <17.8 17.8-19.6 19.7-21.5 21.6-23.4 >23.4
Itisnot known, however, whatportion ofthesedifferences isdirectly related to health and

fertility problems in astrict sense.Assuming theseproblems toberesponsible for half the
difference would imply an impact equal to 10%of gross return and 50%of farmer's net
return tolabour and management. Suchvalues arenot unlikely when compared with dairy
cattle. The economic weights for single performance indicators will now further be
determined and explained, using thepartial budgetingtechnique.
Number of litters per sow per year

If conception is delayed by one cycle (21 days), income that could otherwise have been
obtained overthecourse of ayearwillbeobtained over 386days(365+21days).Annual
performance as indicated inAppendix 4.2 will then be 365/386 x2.22 = 2.10 litters and
365/386x20.6= 19.5pigsraised per sowperyear,which means areduction of0.12 litters
and 1.1 pigs respectively. The resulting losses because of a 3-week delay in conception
include (Jalvingh, 1993):
Revenues foregone
1.1 pigxUS$64 = US$70.40
Reduced costs
Feed for thesow
The allocation of timetogestation, lactation and daysopen per sow peryearchanges with
a delay inconception from 255 (2.22 x 115),67 (2.22 x30) and43 (365 -others) to242,
63 and 60 respectively. Assuming acommon feeding scheme this results in a saving of
about 15kgxUS$0.24=US$3.60.
Feed for thepigs
1.1 pig x30kgxUS$0.40=USS13.20.
51
Chapter 4
• Others
There are hardly any other savings, except for transportation and (medical) treatments,
estimated at US$4.00x 1.1 piglet =US$4.40.
Net result
• Total revenues foregone minus reduced costs equal US$70.40 -(US$3.60 + 13.20+4.40)
=US$49 perthree weeks of delay inconception, orslightly more than US$2perextra day
open.
Ashortening oftheinterval between weaning and conception bythree weeks increases the
annual results presented in Appendix 4.2 to 365/344 x2.22 = 2.36 litters (plus 0.14) and
365/344 x20.6 =21.9pigsraised per sow per year(plus 1.3). Such anincrease implies an
extra profit of about US$58per three weeks of earlier conception, or about US$2.75 per-
avoided-dayopen.So,otherthanwithdairycattle,thecostperadditionaldayopeninsows
decreases withlongerintervals.
Taking into account the difference between the best performing farms realizing more than
2.34 litters per sow per year and the worst performing ones with fewer than 2.14 litters
(Table4.9)impliesadifference inincomeofapproximately US$90persowperyearoreven
37% ofafarmer's typical income (Appendix4.2).
Litter size
Calculating theeconomic value of one additional pigraised per sowperyearincludes:
Additional revenue
• 1 pigxUS$64=US$64
Additional costs
• Feed for the sow:30daysx0.4 kg= 12kg xUS$0.24=USS2.88
• Feed for thepig:30kgxUS$0.40=US$12.00
• Others:transportation, (medical) treatment etc.= US$4.00
Net result
• The additional revenue minus costs equals about US$64 - (US$2.88 + 12.00 +4.00) =
US$45perpigraised.
The same approach can be used when calculating the economic value of one additional
pigborn alive,butthentheprobability ofsurvival shouldbetakenintoaccount.Onaverage,
totalpigmortalityequalsabout 14%(Table4.9)implying asurvivalrateof 86%.Giventhat
themajority ofpigdeathsoccurwithin thefirst few daysof life, theeconomic value ofone
additional pigborn alive is US$45 x0.86 = USS39.The lower the survival rate,the lower
theeconomic value.Thismayespecially betrue with increasing littersize.
The 20%of farms with thebest and thosewith the worst resultsdiffer at least 0.8 pig born
52
aliveand 1.6pigraisedperlitter,asindicated inTable4.9.With2.22litterspersowperyear

andaneconomic valueofUS$39andUS$45perpigrespectively,thedifferences in income
caused by these factors equal US$70 toUS$160per sow per year.This iseven 30 to65%
of afarmer's typical income (Appendix 4.2).
Premature disposal
In the Netherlands about 45%of the sows are replaced annually. The average productive
lifespan of the sows,therefore, is 100/45=2.2 years or about 5litters only. Reproductive
problems are the major reasons for disposal (35%),with failure toconceive as its major
component. Low productivity is the second most important reason (17%), together
accounting for morethan half ofthe annualcullingrate.
Increasing the herd life iseconomically attractive,because (1)fewer replacements have to
bebought orraised, and (2) more sows will reach themost productive parity numbers4to
8(Huirne, 1990;Jalvingh, 1993).Dynamicprogrammingwasused (explainedinChapter7)
toquantify the profitability ofincreased herd life. Results are summarized inTable4.10.
Table 4.10Average profitability of herd life in sows

+1 litter Herd average -1 litter
Litters per total sow life 6.1 5.1 4.1

Annual replacement rate 38.2 45.6 56.7
Litters per sow per year 2.31 2.31 2.31
Pigs raised per sow per year 21.0 20.8 20.6
Pigs raised per total sow life 55.3 46.0 36.6
Income margin/sow/year (US$) 481 (+ 16) 465 442 (-23)
Table4.10 shows that income per sow per year increases by US$16 if the average age at
culling is increased by one litter. One litter less decreases income by more than US$20,
indicatingthatareduction oftheriskofremovalissubject todiminishingadditionalreturns.
Assuming adifference in average herd life of two years between the 20% of farms with
thebestandthosewiththeworstresultswould-accordingtoTable4.10-causea difference
inincomepersowperyearofaboutUS$40,or 16%ofafarmer's typicalincome (Appendix
4.2).
4.3.2 Pigfattening performance
Differences among farms

The economic performance onpig fattening farms ishighly influenced by feed conversion
efficiency, daily weight gain and mortality rate. Differences in these parameters among
farms aresummarized inTable4.11.
53
Chapter 4
Table 4.11 Differences in performance among Dutch pig fattening herds

Performance Five classeswith 20% of farms in each
indicator Worst Poor Average Good Excellent
Feedconversioneffic. >2.99 2.99-2.92 2.91-2.84 2.83-2.76 <2.76

(kgfeed/kg weight gain)
Daily weight gain <681 681-699 700-730 731-755 >755
(grams)
Mortality rate (%) >3.65 3.65-3.06 3.06-2.54 2.53-1.56 <1.56
Aswithsowherds,itisnotpreciselyknownwhatpartofthesedifferences isdirectlyrelated
tohealthproblemsassuch.Butevenifthisisaminorpart,theeffect onincomefor atypical
farm (Appendix 4.3) will still be considerable, as can be derived from the following
economic calculations for the singleperformance indicators.
Feed conversion efficiency

Adifference in feed conversion ratio (kg feed per kg of weight gain) of 0.1 affects feed
consumption by 8.5 kgperhog sold andincomeby 8.5 kg xUS$0.28 =US$2.38per head.
According to Table 4.11, the difference between the lower bound of the 20% best
performing farms and the upper bound of the 20% of the worst performing farms equals
0.25 (3.0 minus 2.75) and, therefore, causes acalculated total difference in income of
0.25/0.1 xUS$2.38 =US$5.95 perhog sold. Such adifference equals 3%of gross return
and66%ofnetreturntolabourandmanagementonatypicalfattening farm (Appendix4.3).
Daily weight gain

In quantifying the economic impact of differences in daily weight gain, it isnecessary to
determine which single cost item (specified inAppendix 4.3) isrelated tothe length of the
fattening period, andwhich isnot.Purchase price of thepiglet andcost of transportation of
the fattened hog are examples of costs which are not related in this way. Moreover, no
relationship should be included for total feed costs,because differences inthis parameter
manifest themselvesalreadyinthefeed conversionefficiency andthusshouldnotbecounted
twice.Theothercostitemsaremorelikelytoberelated tothelengthofthefattening period.
So,the income margin per day of fattening period in the starting situation (Appendix 4.3)
equals:grossreturn -(purchasepricepiglet+feed costs+cost of transportation) =USS178
- (US$64 +69+3)=US$42in 119daysor US$0.35 per day.A 10-gramincrease in daily
weight gain decreases theinitial fattening period of Appendix 4.3by 1.7 days,implying an
economic valueof 1.7 xUS$0.35=US$0.60.Witha 10-gram decreasethese values are the
same. So, the economic value per gram of daily weight gain equals about US$0.06.
Considering theupper and lowerbounds of the20%best and 20%worst performing farms
(Table4.11)thisimplies adifference inincome of US$4.50perhog sold. Such a difference
equals about 3%of gross return and 50% of net return to labour and management on a
typical fattening farm (Appendix4.3),ranking second after feed conversion efficiency.
54
Economic impact of common health and fertility problems
Mortality rate
Assuming that, on average, mortality occurs halfway the fattening period, the losses
include:
• costs before death: purchase price piglet + 59.5/119 x (gross return - purchase price piglet)
= US$64 + 0.5 x (US$178 - 64) = US$121; and
• return to labour and housing foregone after death: 59.5/119 x (housing +labour + net profit)
= 0.5 x (US$20 + 10 - 1) = US$15.
So, in total, these costs average US$136 per dead fattening hog, or US$1.36 per percentage
of hog mortality. For the corresponding differences between the highest and the lowest
classes in Table 4.11 this implies a difference in income of 2.1% x US$1.36 = US$2.86 per
hog sold. This difference equals almost 2% of gross return and 32% of net return to labour
and management on a typical fattening farm (Appendix 4.3), ranking third after feed
conversion efficiency and daily weight gain.
References
management. PhD-Thesis,Department of FarmManagement,Wageningen Agricultural University,
Wageningen, 146pp.
Huirne, R.B.M., 1990.Computerized management support for swine breeding farms. PhD-Thesis,
Department ofFarm Management, Wageningen Agricultural University, Wageningen, 165pp.
Jalvingh, A.W., 1993.Dynamic livestock modelling for on-farm decision support. PhD-Thesis,
Department ofFarm Management and Department of Animal Breeding, Wageningen Agricultural
55
Chapter 4
Appendix 4.1 Typical resultsfor commercial Dutch dairy farms
Herd size45 cows -young stock 14heifers and 16calves -annual milk yield 7000kg per
cow containing 4.35%of fat and 3.4% of protein -herd calving interval 380days -annual
culling rate30%
Grossreturn (percowperyear)
milk (7000kgxUS$0.42) US$ 2940
cattle inventory - 440
US$ 3380
Costs(percowperyear)
labour (50hrsx US$18) US$ 900
machinery costs - 460
feed costs - 672
housing (depreciation, interest and maintenance) - 540
rent for land - 203
fertilizer - 116
health care - 83
others (artif.insem., electricity, interest, etc.) - 500
US$ 3474
Netprofit(percow peryear) -/- US$ 94
Netreturnto labourandmanagement (percow/ year) US$ 806
Netreturntolabourandmanagement(total herd/ year) US$ 36270
56
Economic impact of common health and fertility problems
Appendix 4.2 Typical resultsfor commercial Dutch sow farms
Herdsize 150sows-weaningat30days-2.22litterspersowperyear- 10.8pigsbornalive

per litter -mortality rate 14%-9.3 pigsraised perlitter-20.6pigsraisedper sow peryear
Grossreturn(per sowperyear)
20.6pigs xUS$64 US$ 1318
sow inventory -/- 20
USS 1298
Costs(per sowperyear)
feed: sow (incl.repl.gilts) 1157kg atUS$0.24,
andpiglets 20.6x30kgatUS$0.40 US$ 525
housing (depreciation,interestandmaintenance) 314
labour 306
health care 45
interest (herdandfeed stock) 36
costof transportation piglets 29
others (artif.insem., water,electricity, etc.) 105
US$ 1360
Netprofit (persow peryear) -/- US$ 62
Netreturntolabourandmanagement (per sow/year) US$ 244
Netreturntolabourandmanagement (total herd/year) US$ 36600
57
Chapter 4
Appendix 4.3 Typical resultsfor commercial Dutch pigfattening farms
Herd size 1600hogs -2.61 deliveries per year -mortality rate 2.8%-4058 hogs sold per
year-startingweight25kg-endingweight 110kg-dailyweightgain715gr-net fattening
period 119days
Grossreturn(perhogsold)
85.3slaughter weight xUS$2.09 USS 178
Costs(perhogsold)
feed: feed conversion 2.88 and 85kgof weight
gain makes 245kgof feed atUS$0.28 US$ 69
purchase piglet - 64
housing (depreciation, interest andmaintenance) - 20
labour - 10
interest (herd andfeed stock) - 3
cost of transportation hogs - 3
health care - 2
others (water,electricity, mortality,etc.) - 8
USS 179
Netprofit (perhog sold) -/- USS 1
Netreturnto labourandmanagement (perhog sold) US$ 9
Netreturntolabourandmanagement (total herd/year) USS 36522
58
5
Critical steps in systems simulation
A.A. Dijkhuizen, A.W. Jalvingh & R.B.M. Huirne

Department of Farm Management, Wageningen Agricultural University, Wageningen, the
Netherlands
Objectives
• thecritical stepstobetaken insystemssimulation (ie,definition ofthesystemandstatement
of objectives, analysis of datarelevant tothe model,model construction, validation of the
model, sensitivity analysis,and application of themodel)
• how to make abetter choice from modelling types andtechniques,especially with respect
todeterministic and stochastic models
5.1 Introduction
Models are essential tools for understanding animal health economics. Mathematical
models areespecially useful in this context and generally defined as a set of equations to
describe or simulate an interrelated part (system) of the real world (Hillier & Lieberman,
1990). Three broad functions can be distinguished: (1)toprovide an objective basis for
assessing and assimilating available information about the system, (2) to detect where
essential knowledge of the system is lacking or inadequate, indicating needs for further
research, and (3)to assist inthemanagement control ofthe system.
Basically, there are two different modelling approaches to be considered: a positive
approach and a normative approach. The positive approach can best be indicated asa
description of relevant processes and characteristics by statistical/epidemiological data
analysis (theso-called empiricalmodelling).Traditionally,researchinlivestock production
has mainly been conducted inthis way.In animal health economics more attention ispaid
tothenormative approach,which includescomputer simulation techniques (the so-called
mechanistic modelling). Computer simulation is a method for analysing a problem by
creating a simplified mathematical model of the system under consideration which can
thenbe manipulated bymodification of inputs.Thismethod isespecially attractive where
real-life experimentation would be impossible, costly or disruptive (eg, with highly
contagious diseases), and for exploring strategies that have not been applied yet. Special
attention has to be paid to the correspondence between model and reality to obtain
meaningful results for real-world situations.
Inthischapterthe critical steps andbasic conceptsinsystems simulation arepresented and
discussed.
59
Chapter 5
5.2 Systems and systems analysis

The terminology associated with systems and systems analysis is generally acollection of
termsthat areusedinotherfieldsoften withdifferent meaning orconnotation. Inthemodel
ling context, asystem is generally described as a-complex -set of related components
which exist within somepre-defined boundary and react asawhole toexternal or internal
stimuli (eg, animal, herd, population). Placing of theboundary is considered the key issue
step 1
definition ofthe
system and objectives ^
for modelling
V
step 2
analysis ofdata
relevant to the model
^'
step 3
construction of the
model
^<
step 4
\ validation of the
J model
)f
step 5
sensitivity analysis
^'
ste 6
use nf model in P W.
decision si ipport
Figure 5.7 Thebasicsteps of systems simulation
60
Criticalsteps insystemssimulation
in defining and structuring any system, and should depend primarily on the function the
model hastofulfil (Dent &Blackie, 1979).
The term systems analysis is generally used to refer tothe process of examining complex
systems, where all major inputs and outputs are accounted for by theuse of mathematical
models. Dent &Blackie (1979) consider six critical -and interlinked -steps involved in
applying systems analysis, aspresented in Figure 5.1.The steps arecommented onone by
Step 1Definition of the system and objectives for modelling

Aclear description of the system and statement of the reasons why the system simulation
work is being carried out is an essential first step. The system under consideration, the
nature of the problems to be solved, the relevant data available, and to what degree of
detail answers are required highly determine the type of model tobe used. Different types
of models are available to simulate asystem (Law &Kelton, 1991). Afirst choice that
shouldbemadeisthatbetweenstaticanddynamicmodels.Astaticmodeldoesnotcontain
time as avariable and, therefore, cannot simulate the behaviour of a system over time,as
opposed to adynamic model.Amodel that makes definite predictions for quantities (such
as milk production and live weight) is called deterministic. Astochastic model, on the
otherhand,contains probability distributions todealwithuncertainty inthebehaviour ofa
system.Thesedistributions canbe used directly or through random sampling. In the latter
case, repeated runs of the model are necessary to provide insight into the variation in
outcome. Afinal difference to consider concerns optimization versus simulation. An
optimization model determines the optimum solution given the objective function and
restrictions, whereas a simulation model calculates the outcome of pre-defined sets of
inputvariables (scenarios, strategies)
Step 2Analysis of data relevant to the model

The model design istoalarge extent dependent on the data available or on the feasibility
of generating data within the time limits set by the research. Complete data availability
will seldom, if ever, exist. An obvious shortage occurs when simulation studies are
conducted in an early stage of research, eg, toexplore new strategies that have not been
applied yet. Especially then, however, simulation studies have proved tobe beneficial to
help structure the problem and set priorities for further (empirical) research. In those cases
aclose cooperation with experts may help toget thebest estimates for the necessary input
data and relationships. Once the model is available, the -potential -impact of uncertain
estimates caneasily bedetermined through sensitivity analyses (Step5).
Step 3 Construction of the model

The construction of a mathematical model is usually a multistage procedure. Three
functionally different approaches can be distinguished:
the bottom-up approach, beginning with components of models at the lowest level of
organization and combining them without any aggregation;
61
Chapter 5
• the top-down approach, which begins with a simple representation of the entire system
and iscomplete when theresolution of themodel issufficient tosatisfy theobjectives; and
• the prototyping approach, aniterative compromisebetween thefirsttwoalternatives.
Development of amodel with the prototype approach begins with simple modelling of
single subsystems. The process of development progresses by formulating more
sophisticated representationsofthemostimportantsubsystemsandaggregating,deletingor
ignoring subsystems of lesser importance. Because of its flexibility, the prototyping
approach is especially favourable for models of large and complex systems, such as
livestock production systems.Itallows experts (aswell asfinal users) tobeincluded inthe
modelling process at an early stage.Regular interaction withthesepeople maintains their
interest inthe simulation study.Itcanalsohelptoavoidthemistake (often madeby novice
modellers) to start with tooexcessive an amount ofmodel detail.
Step 4 Validation of the model

Validation is considered a very important but difficult step in the entire modelling
procedure. The key issue here is to judge whether or not the model mimics reality
sufficiently well to fulfil the purposes for which it has been developed. If a model is
considered 'valid', then the decisionsmadewiththe model shouldbe similar tothose that
would bemadebyphysically experimenting withthesystem (ifpossible).If amodel isnot
valid, then any conclusions derived from itwillbe ofdoubtful value.
In the literature adistinction is made between internal and external validation (Taylor,
1983).Internalvalidationisacontinuousprocessthroughoutthedevelopment stageofthe
model, ensuring that all assumptions are in accordance with the theory, experience and
relevant general knowledge. Internal validation can thusbe described asensuring that the
rightanswer, decision orrecommendation isprovided bythecorrectmethod, and that each
equation or part of the model hasalogical basis,uses correct parameters and is correctly
written. External validation refers tothecomparison of themodel's performance against
the performance of the real system, in which the model is considered a 'black box'.
Information should be produced, which enablesthe user toconclude whether to accept or
reject themodel's recommendation. Thismayinclude asensitivity analysis (Step5).
Twofundamental issuesrelatetothevalidationofanycomputer simulation model.First,the
fact that amodel behaving like reality for one set of inputs and operating rules does not
guarantee that it will perform satisfactorily for adifferent set of conditions. Second, there
is nototally objective and accepted approach tovalidation, because validation necessarily
includes:(1)theway(s)in whichthemodelisused,(2)thetestswith which tovalidate the
model, (3) the data to serve as abasis for comparison, and (4) the criteria to measure the
(in)validity of the model.When amodel and theresults areaccepted by the user as being
'valid', and areused as an aid in making decisions, then such amodel iscalled 'credible'
(Law&Kelton, 1991).Althoughcredibilityhasnotbeendiscussed agreatdealinliterature
on systems simulation, it is considered as important as validation in terms of actual
implementation of simulation results.
62
Criticalstepsinsystemssimulation
Step 5Sensitivity analysis

One of the most powerful decision-analytic techniques is sensitivity analysis, in which
the values of relevant parameters are systematically varied over some range of interest to
determine their impact ontheresults.Ifeachof theassumptions isindependent of allother
assumptions, then it is reasonable to vary one parameter at a time, assuming all other
parameters to be at their baseline or 'best guess' values. On the other hand, if several
assumptions are interdependent, or if it seems important toexamine the trade-off between
specific gains and losses,then it isbest toexamine several parameters simultaneously.
Good knowledge of sensitive parameters should be available and entered into the model.
If this is not available, sensitivity analysis can helptoset priorities for further (empirical)
research. In this way avaluable interaction between computer simulation and field data
analysis ispossible. Computer simulation may beused toquantify the significant gaps in
(veterinary) knowledge, while knowledge obtained from field data research increases the
realness of economic models.This interaction isconsidered fundamental to the study of
disease and diseasecontrol.
Step 6 Useof model in decision support

If accepted, the modelcan beused for providing answers tothe questions for which it has
beenbuilt.Thiscanbedoneeitherwithin aresearchenvironment only(ie,providing output
for scientific publications) orasanactualtoolfordecision-support inthefield. Thelatteruse
isonthe increase.Aso-called Integrated DecisionSupport System (IDSS) is commonly
considered tobe anideal framework for modeluseunder field conditions, and defined asa
user-machine system for providing information to support operations, management and
decision-making functions in anorganization. The system utilizescomputer hardware and
software, manual procedures, models for analysis,planning, control and decision making,
and adatabase (Davis &Olson, 1985).Marsh (1986),Huirne (1990),Jalvingh (1993) and
Houben (1995)developed comprehensive butflexiblemodels for on-farm decision support
inthe areaof animal healthandreplacement economics indairy cattle and swine,meant to
beincluded in themodelbase of such anIDSS.
Different wayscanbeconsideredtoactuallymakethesemodelsavailableforuseinthe field.
Asastart,themodelscouldbemadeavailableforacentralcomputer,whichcanbeaccessed
by individual users (farmers, advisers). Incase of indirect use,the adviser carries out the
modelcalculations andinterprets andreportstheresultstothefarmer (intermediary mode).
Incaseof directuse,thefarmer andtheadvisermayusethemodelon-line (terminal mode),
oroff-line (clerkmode)bypreparingand submitting inputtothecentralcomputer.The final
stepistohavethemodels available onthePCofboththeadviser andthe farmer.
5.3 Deterministic and stochastic modelling

In the previous section adeterministic model wasdescribed asbeing amodel that makes
definite predictions for quantities (such as milk production and live weight), whereas a
stochastic model contains either probability distributions or random elements todeal with
uncertainty in the behaviour of a system. In the literature there is agreement on the
63
Chapter 5
distinction between (pure) deterministic models on the one hand and stochastic models
containing random elements on the other. This is not the case with respect to stochastic
modelscontaining probability distributions. Several authorsclassify these models asbeing
deterministic, which is not correct and may underestimate their value and potential
applications. Therefore, the three different types of models will further be illustrated and
discussed,by using asimplified example.
Considerthesituationwherefor amodeldealingwithsowreplacement economics,ayoung
replacement sow is taken from apopulation where the size of the first litter is normally
distributed (see Figure 5.2). Litter size in this example ranges from 6to 12pigs and most
sows (ie, 30%) fall into the class with 9pigs per litter. The expected performance of a
replacement sowtakenfrom thispopulation dependsuponthetype ofmodelunderconsider
ation. In case of adeterministic model, each replacement sow is considered to produce
exactly 9pigs in her first litter, this being the most likely litter size of the population she
comes from. All costs and returns in the calculation then are also derived from such a9-
pig sow.In astochastic model with probability distributions, each replacement sow is
expected toproduce 0.05 x6+0.10 x7+ +0.10 x 11 +0.05 x 12=9.0pigs inthe first
litter.Nowthecostsandreturnsinthecalculation arederived (ie,weighed)from thevarious
single litter-size classes under consideration. This is afundamentally different approach
from thedeterministic model andwill lead todifferent economic results aswell.Incaseof
astochasticmodelwithrandomelements,eachreplacement sowisrandomly drawn from
the specified probability distribution and will have alitter size of 6, 7, ,or 12pigs.The
costs and returns,therefore, will differ accordingly between the sows.With a sufficiently
30%
30% ,
20%
10%
0%
10 11 12
Litter size
Figure 5.2First-litter size performance in asow population
64
large number of drawings (ie, multiple runs) the average litter size of the replacement
sowswill approximate9.0pigsagain,providingthesameaverageeconomic outcome asthe
stochastic model using probability distributions.
As illustrated in the example, deterministic models donot take into account uncertainty
(ie, variation) associated with future events, resulting in an oversimplification of the
conditionsunderwhichdecisionshavetobemadeinreality.Theapproachusing probability
distributions (ie, dynamic probabilistic or (modified) Markov chain simulation) and the
one using random numbers (ie, Monte Carlo simulation) have the advantage that, for
instance, animals with different performances can betreated differently, eg,amore liberal
insemination and replacement policy for high-producing animals. Moreover, future
performance canberelatedtocurrentperformance. Therefore, cullingofanimalswithalow
performance will influence the performance realized in later production cycles. In the
deterministic approach this is not possible; the resulting average performance per
production cycle isalways equaltothe input value.
One advantage of the approach using probability distributions is that there will be
observations in all classes, which means that the model will exactly provide the expected
value of the results and only one run is needed toobtain these results. In fact, the results
ofaverylargeherdorpopulation aresimulated,withanimalsavailableinallpossiblestates.
In the model using random numbers, the presence of observations in all classes is not
guaranteed. The larger the number of observations, the better the average result will
approach the real expected value. Replicated calculations are needed to obtain a reliable
estimate of the averageresults.
One advantage of models with random numbers and multiple runs,on the other hand, is
the available information about the expected standard deviation in the results, which
allowsfor statistical testsandnon-neutral riskanalysis.Performing thesetestsand analyses
requires a careful design and analysis of the modelling experiments, in order to obtain
reliable estimates of average results and standard deviations. By simply choosing alarge
number of replications, for instance, a difference between two strategies can always be
made significant, duetothefact that the standard errorofthemean willthen be small.
Applications of stochastic models with randomelements often focus onthe comparison of
average results only,rather than on atrade-off between expected outcome and its variation
(ie, non-neutral risk analysis). If so, then theapproach using probability distributions had
betterbeapplied.Sinceonerunsuppliestheexpected valueoftheresults,various sensitivity
analysescanbecarriedoutmucheasierthanisthecasewithmodelsusingrandomnumbers.
An overview of published models and their features in the area of reproduction and
replacement economics indairy cattle and sowswasgivenby Jalvingh (1993).
5.4 Common combinations of modelling type and technique

The choice of the modelling type and technique will depend on a number of factors,
including:
• thenature of the problem;
• theresources available,eg,time,money and analytical tools;and
65
Chapter5
• the availability of data and information about the problem.
Even within specific narrow problem domains such as animal replacement decisions, diffe
rent modelling types and techniques are used. Most common combinations in the literature
are summarized in Table 5.1.
Model calculations in animal health economics often suffer from a serious lack of accurate
data, as discussed before. Since the mid-eighties much effort has been put into designing
and implementing integrated veterinary, zootechnical and economic record keeping systems
(Morris & Dijkhuizen, 1992). In the future, systematic epidemiological and economic
analyses of these databases should be given high priority. A basic question is whether -
and, if so, which - standards are available to express the frequency and severity of the
various diseases under field conditions.Further research in this field is necessary and can be
of great practical value.In this way avaluable interaction between economic research on the
one hand and veterinary and zootechnical research on the other is possible.
Table 5.7 Common combinations of modelling type and technique3

Stochastic
Static Dyna- Determi- Probab. Random Optimization Simulation
nie nistic distrib. elements
Gross Margin Analysis x x x
Partial Budgeting x x x
Cost-Benefit Analysis x x
Decision Analysis x x x
Linear Programming x x x
Dynamic Programming x x x
Markov Chain Simulation x x x
Monte Carlo Simulation x x x
a
Thefirstfour (basic)methodsof economic analysisinthistablewereexplained inChapter 3;theother, more
advanced ones,will follow inthe next chapters.
References
Davis, G.B. & Olson, M.H., 1985.Management information systems. Conceptual foundations,
structure and development. McGraw-Hill, New York, 693 pp.
Dent, J.B.& Blackie, M.J., 1979.Systems simulation in agriculture. Applied Science Publisher Ltd.,
London, 180 pp.
Hillier, F.S.& Lieberman, G.J., 1990. Introduction to operations research. McGraw-Hill, New York,
954 pp.
66
management. PhD-Thesis,Department ofFarmManagement, Wageningen Agricultural University,
Wageningen, 146pp.
Huime, R.B.M., 1990.Computerized management support for swine breeding farms. PhD-Thesis,
Department of Farm Management, Wageningen Agricultural University,Wageningen, 165pp.
Jalvingh, A.W., 1993. Dynamic livestock modelling for on-farm decision support. PhD-Thesis,
Department of Farm Management and Department of Animal Breeding,Wageningen Agricultural
Law,A.M.&Kelton,W.D., 1991.Simulation modelingandanalysis.McGraw-Hill,NewYork,759

pp.
Marsh, W.E., 1986.Economic decision making on health and management in livestock herds:
St.Paul, 304pp.
Morris,R.S.&Dijkhuizen, A.A., 1992.Theapplication ofcomputersoftware inthemanagementof

fertility disorders inpigs.Proceedings 12th Congress of the International Pig Veterinary Society,
Amsterdam, I:45-48.
Taylor,A.J., 1983.Theverification of dynamic simulation models.Journal ofOperational Research

Society 34:233-242.
67
Linear programming to meet management targets and
restrictions
A.W. Jalvingh,A.A. Dijkhuizen &J.A. Renkema

Department of Farm Management, Wageningen Agricultural University, Wageningen, the
Netherlands
Objectives
From thischapter thereader should gain knowledge of:
• thecharacteristics of linear programming
• theformulation of alinearprogramming model
• the solving procedure
• the assumptions used
Themethodisintroducedbyasimplified exampleandfurther illustratedwithan application
tooptimizing adairy herd calving pattern.
6.1 Introduction
Being managers, farmers need toallocate limited resources tocompeting activities in the
best possible way. The allocation problem canbe solved by analysing a large number of
alternatives,usingtechniquessuchaspartialandwhole-farm budgeting.Withthebudgeting
procedure, however, each single plan has to be identified and evaluated by detailed
calculations. For complex problems, such calculations are time-consuming and become
tediousandburdensome.Moreover,itisonlybychancethattheplanschosenfor budgeting
analysisincludetheoptimalone.
Linear programming uses the same type of information as is done in the budgeting
procedure, but the mathematical technique involved guarantees that the optimal plan is
determined. Theessential characteristicsofalinearprogramming model arethat (1)there
is afunction to be maximized or minimized, (2) there are limited resources that can be
used to satisfy the objective, and (3)there areseveral ways of using the resources (Heady
& Chandler, 1958). In agriculture, linear programming is most extensively used in
determining least-cost rations and inplanning the farm business organization (Boehlje &
Eidman, 1984).In determining the least-cost ration, the objective can be to minimize the
cost of meeting the nutritional requirements of acertain type of livestock while using
particular feed ingredients. Inplanning the farm business,land, labour and machinery and
equipment resources are allocated tocompeting activities such asproduction of different
crops and different typesof livestock production inordertomaximize income.
The method of linear programming is first introduced and illustrated with an example.
69
Chapter 6
Assume that atthe start of the grazing season, allbeef cattle on afarm are treated with an
anthelmintic. For years the farmer hasused anthelmintic A. Recently, anthelmintic B has
come on the market. Anthelmintic Acosts US$2 per animal and BUS$6.The firms that
producetheanthelminticshavecarriedoutexperimentstoestimatetheeffect ofapplyingthe
anthelmintics. According tothese experiments, Aleads toan increase in liveweight of 20
kg, while Bleads to an increase of 40 kg, if compared with animals that have not been
treated. Although the veterinarian is enthusiastic about anthelmintic B,the farmer is abit
reluctant to use it because of the higher costs. The farmer decides that (s)he wants to
maximize the total effect of thetherapy,but does notwant to spend more than US$600on
anthelmintics.Furthermore,thenumber of animals tobetreated should notexceed 150.
This problem can be formulated as alinear programming problem. It refers to a situation
of allocatinglimitedresources(money,numberoftreatments) tocompeting activities (treat
mentwith anthelmintics AandB)inordertomaximize acertain objective (thetotal effect
of the treatment). To formulate the mathematical model of the problem, let Xj andX2
represent the number oftreatments with Aand Brespectively.LetZbetheresulting effect
on extra live weight gain for the herd as a whole; x^ and X2are the decision variables
(activities) for the model. The relationship between Z and xj and X2is as follows: Z=
20xj +40x2-Theobjective istochoosethevaluesofxj andX2 soastomaximizeZ, subject
totherestrictions ontheirvaluesimposedbythefarmer. Thusthemathematical formulation
oftheproblem is as follows:
Maximize Z = 20x ! + 40x 2
subjiect to the restrictions

2xj + 6x2 <600
x
l + x
2 < 150
xj > 0 , x 2 > 0
It isnecessary todefine the decision variables tobe nonnegative. This small problem has
only two decision variables, and therefore only two dimensions, and hence a graphical
procedure canbeused to solve it.Thisprocedure involves constructing a two-dimensional
graphwithxj andX2 astheaxes.Thefirststepistoidentify thevaluesofxj andx2 thatare
permitted given the restrictions.This isdone by drawing the linesthat border therange of
permissible values. The graphical representation of the linear programming problem is
giveninFigure6.1.First,eachrestriction istreated separately.Resulting from therestriction
on the amount of money to be spent on the treatments (ie, US$600), 300 animals can be
treated withA, 100animalswithB,orany linear combination ofAandB.Thisisdepicted
inFigure6.1aslineCC'.Theconstraint onthetotal number ofanimals tobetreated results
in 150animals treated with A, 150animals treated with Bor any linear combination ofA
and B (line DD').If all constraints are considered simultaneously, any points inside the
area orat theboundary of OCED' are feasible combinations of treatments with A andB.
This areaisknown asthe 'feasible set'.
70
Linear programming to meet management targets and restrictions
X2(B)
150
The final step is to identify the point in this region that maximizes the value of Z. The
optimal combination of the number of treatments A and B depends on their relative
efficiency. Twoanimals treated with Awill havethe sametotal weight gain asone animal
treated with B.The line FF'in Figure 6.1 denotes those combinations of xj and x2that
generate atotal effect of 2000kg.With lineFF'moving totheright,higher levels of total
weight gain are obtained. In case of minimization the line FF' has to be moved into the
direction oflowerlevelsofZ.Thelineismovedtotherightuntilittouchesthefarmost edge
ofthefeasible setpointE).Combinations ofnumbersoftreatments arenotpossible beyond
this point because adequate quantities of the money and/or animal resources are not
available. If we draw aline from point E toeach axis of the graph, they indicate that 75
treatments with Aand 75treatments with Bwill maximize theeffect of thetotal treatment
(Z=75x20+75x40=4500kg).Whenmoreconstraints anddecisionvariables areadded,
the example becomes amultidimensional problem that will be impossible to represent
graphically.Theunderlying principleoftheoptimizationprocedure oflinearprogramming,
asillustrated in this simplified example, remainsthesame,however.
71
Chapter 6
6.2 Linear programming models in general
6.2.1 General formulation

With the above-mentioned simplified example in mind, we will now give the general
formulation of the linear programming model. A linear programming model has the
objective toselectthevalues for xj, x 2 ,..., x n (thedecision variables oractivities) so asto
Maximize orMinimize Z=cjxj +c 2 x 2 + ...+c n x n
subject tothe restrictions
a
l l x l + a 1 2 x 2 + " + alnxn^bl
a 2 i x 1 + a 2 2 x 2 +...+ a 2 n x n <b 2
a
m l x l + a m2 x 2 +- +a mn x n s b m
andxj >0, x 2 >0,..., x n > 0
The function being maximized or minimized, Cjxj + c 2 x 2 + ... + c n x n , is called the

objective function, with x:being the decision variables. The restrictions are normally
referred to asconstraints. The first mconstraints,representing thetotal usage of resource
bj, arecalled functional constraints. Similarly,thex;>0restrictions arecalled nonnegative
constraints. The model may also include 'greater than orequal to' constraints, as well as
equality constraints.Theinput constants, aj;, bj andc;,arereferred to asparameters of the
model.
Thebasic structure of any linearprogramming model is amatrix, with thecolumns in that
matrixbeingtheprocessesoractivitiesandtherowstheresourceconstraints.Three general
types of constraints areusually included:
• realconstraints which limitphysical resource availability;
• institutional and subjective constraints which reflect limits imposed by the outside
institutions orpersonal preferences oftheoperator;and
• accounting constraints which areused tokeep track of resources or will provide structure
tothemodel.
Alinear programming problem hasdifferent types of solutions.Thefeasible solution isa

solution for which all constraints are satisfied. The feasible region is the collection of all
feasible solutions. It ispossible that there is no feasible solution to aproblem. This would
be the case if in the linear programming example from the previous section at least 110
animalsweretreatedwithanthelminticB.Iftherearefeasible solutions,linearprogramming
should find which one isbest, measured against the value of the objective function of the
model. Anoptimal solution is afeasible solution thatresults in themost favourable value
of the objective function. So,the optimal solution maximizes or minimizes the objective
72
Linear programming t o meet management targets and restrictions
function overtheentirefeasible region.Most problems will havejust oneoptimal solution.

Itispossible, however, tohave more than one.This would be so in the example above if
the effectiveness oftreatment Bwasmodified such that all points on line segment EC'in
Figure 6.1 wouldbeoptimal.
6.2.2 Solving procedure

For the sake of convenience,aprecise setof mechanical rules has been developed tosolve
a linear programming model.These rules specify each stepthat is to betaken during the
solutionprocess,andareactuallyatrial-and-errorprocedureforproblemsolving.However,
they have been constructed in such away that each trial results in an improved answer.
The rules also guarantee that, if an optimal value exists, it will be found within a finite
number of steps (Heady&Chandler, 1958).
Themechanical rules for solving linearprogramming problems arecollectively known as
the simplex method. Thepreviously discussed characteristics of a linear programming
model and the example presented will be used to provide abasic understanding of the
simplex procedure].
Itwasshownearlierthattheoptimalcombination oftreatmentswithAandBoccurred atthe
boundaryofthefeasible set atthepoint ofintersection betweentheconstraints with respect
tothe maximum amountof money tobe spent and themaximum number of animals tobe
treated.Thisintersection isreferred toasa 'cornerpoint'. Itcan beproven mathematically
that theoptimal solution will alwaysbe at acorner point.Thus,todetermine the optimum,
theonlypointsthatneedtobeinvestigated duringthetrial-and-errorprocessofthesimplex
method are the corner points at the boundary of the feasible set. This is exactly how the
mechanical rules of the simplex procedure operate: they search thecorner points of the
boundary of the feasible set in a sequential fashion. For example,the procedure starts at
the original cornerpoint ofFigure6.1and moves along the axisof treatment withAtothe
cornerpoint denoted byD'.Profit isevaluated atthat point and then the next corner point
of the feasible space, corner point E, is investigated. Once corner point E has been
evaluated, the simplex method investigates thepossibility of moving tocorner point C.
SincecornerpointChasalowerobjective function valuethancornerpointE,theprocedure
will stop and declare cornerpoint E the optimum. The mechanical rules of the simplex
method arestructured suchthateachfollowing corner point should result inahigher value
of the objective function. Once acorner point that has alower value is reached, further
investigation is unnecessary because noother corner point in the feasible set has ahigher
valueoftheobjective function, soanoptimal solution hasbeen found.
Information on the economic contribution of the various resources to the measure of
performance (Z)is extremely useful. The simplex method provides this information in the
form ofshadow prices for therespective resources.
'No time will bedevoted todiscussing thismethod indetail.Those whoareinterested may consult numerous
workswhichprovidedetaileddiscussionsonthisprocedurealongwithexamples thatcan besolved byhand(see,
for example,Heady&Chandler, 1958;Boehlje &Eidman, 1984;Dentetal, 1986;Hillier&Lieberman. 1990).
73
Chapter 6
The shadow price for resource i (denoted by yj) measures the marginal value of this
resource,thatis,therate atwhichZwouldbeincreasedby(slightly) increasingthe amount
of thisresource (bj).
The shadow pricesfor theanthelmintic problem arecalculated as follows:
yj = 5isshadow pricefor resource1

y2= 10isshadow pricefor resource2
wheretheseresources represent themaximum amountofmoney thefarmer wantsto spend

on anthelmintics and themaximum number of animals tobe treated.These numbers can
beverified bycheckinginFigure6.1 thatindividually increasingeachbjby 1 wouldindeed
increase the optimal value of Z by 5 and 10 respectively. For example, the optimal
solution, (75, 75) with Z - 4500, changes to (76Vi, 74Vi) with Z = 4510 when b 2 is
increasedby 1 (from 150to 151),sothat
y 2 =AZ=4510-4500= 10
The kind of information provided by shadow prices is especially valuable to the

management when itconsiders reallocations ofresources withintheorganization. It isalso
helpful whenanincreaseinbjcanbeachievedonlybypurchasingmoreoftheresource.For
example, suppose that Zrepresents profit andtheunit profits of the activities include the
costsofalltheresourcesconsumed.Thenapositiveshadowpriceofyjforresourceimeans
that thetotal profit Zcanbe increased by yjbypurchasing one moreunit of this resource
atitsregularprice.Alternatively,ifapremiumpricehastobepaidfor theresource,then yj
representsthemaximumpremiumthatwillbeworthpaying.So,basedontheshadow prices
of acertainresource,itmaybedecided toincreaseits amount.
Sensitivity analysis canbe used toidentify the most sensitive parameters.One parameter
at atime ischanged and its influence on the optimal solution determined. Typically, more
attention isgiventoperforming sensitivity analysisonthebjandc;parametersthantothat
on the aj; parameters. In many cases,a;:values are determined by the technology being
used,sotheremayberelatively little(orno)uncertainty abouttheirfinalvalues.Parametric
programming involves the systematic study of how the optimal solution changes if many
of theparameters change simultaneously over some range.Thistechnique can be used to
study theeffects of trade-offs inparameter values.
Because of their mechanical nature, the rules representing the simplex method have been
computerized sothat only the model of the problem needs tobedeveloped and submitted
tothecomputer for 'number-crunching' (optimal solution andsensitivity analysis).Various
software packages that cancarry out these tasks onmainframe andpersonal computers are
available. Some examples are XA(Sunset Software Technology, San Marino, Ca, USA),
UNDO (The Scientific Press, Palo Alto. Ca., USA), MICRO-LP (Scicon Ltd, Milton
Keynes,UK) andOMP(Beyers &Partners nv,Brasschaat, Belgium).
74
6.3 Assumptions of linear programming

Several assumptions areused inlinear programming. Fourbasic assumptions are essential
todeterminewhetherlinearprogramming isapplicable toaparticularproblem and whether
it will provide ameaningful and precise answer (Heady &Chandler, 1958; Boehlje &
Eidman, 1984;Hillier &Lieberman, 1990).
Additivity and linearity in input and output coefficients

Theadditivity assumption specifies thatthetotal amount ofresourcesused for twoormore
activities must be the sum of the amounts ofresources used for each separate activity. The
same assumption applies toproducts produced. The implication of this is that interaction
between activitiesisnotallowed.Ifnecessary,thiscanbeincluded byaddinganew process
that reflects thecomplementarity between twoactivities (eg,croprotation).
The assumption of linearity follows directly from that of additivity. Linearity implies that
multiplying all inputs used in an activity by aconstant results in aconstant change in the
output ofthat process. Thus, the production function for an activity is linear. To reflect
nonlinearproduction relationships,theserelationships areapproximated bylinearsegments,
with each linear segment representing a separate activity or decision variable. The
assumptions of linearity and additivity refer torelationships between activities.
Divisibility in resourcesand products

Thedivisibility assumption isthat activity unitscan bedivided intoany fractional level,so
that noninteger values for the decision variables are permissible. Frequently linear
programming is applied, even if an integer solution is required. If the solution obtained is
a noninteger one, then the noninteger variables are merely rounded to integer values.
However, the optimal linear programming problem is not necessarily feasible after the
variables havebeen rounded. Even if it is feasible, there isnoguarantee that this rounded
solution will be the optimal integer one. Because the mathematical procedure requires
complete divisibility of inputs andoutputs, apractical interpretation of the results requires
thejudgment of theuser.
Finiteness
This assumption setsalimittothenumberofalternativeprocessesandresource restrictions
that can be included in the analysis. In fact, this number will depend on the software
packageusedtosolvethelinearprogrammingproblem.Mostpackageswillallowthousands
of activities andrestrictions.
Single-valued expectations
The single-valued expectations assumption essentially eliminates the important dimension
ofriskfrom linearprogramming analysis.Thisassumption specifies thatresource supplies,
input-output coefficients, and commodity and input prices must beknown with certainty.
Although many will arguethatthisassumption isunrealistic andmakesthe results suspect,
it should not lead torejecting linearprogramming altogether. First,thesame assumption is
75
Chapter 6
required in many other analysis procedures used in animal health economics, including
partial budgeting and gross margin analysis. Second, prices and production coefficients
caneasilybevariedinthelinearprogrammingframework, andthis 'sensitivity analysis'can
illustrate the resource allocation and income impacts of alternative sets of prices and
production efficiencies.
Theassumptions in perspective
A mathematical model is intended to be only an idealized representation of reality.
Approximations and simplifying assumptions generally are required in order tokeep the
model tractable. It is very common in real applications that almost none of the four
assumptions holdcompletely. Iftheassumptions of linearprogramming areconsidered too
restrictive, techniques are available to relax them. Nonlinear, separable and quadratic
programming techniques can beused tohandle nonlinear functions. Integer programming
canbeusedinsituationswherefractional amountsofinputsoroutputsarenotfeasible from
a technical nor from apractical point of view. Stochastic and quadratic programming
procedures canbeusedtoincorporate riskdimensions inthe analysis,replacing thesingle-
valuedexpectationsrequirement.Applyingthesetechniquesresultsinincreased complexity
of modelconstruction, reduced model sizeand highercosts of solving the model.
In Chapter 19you canfind acomputer exercisesimilar to the example given in the introduction
of this chapter. You will practise the principles of linear programming byallocating the limited
resourceslabour and grassto the competing activities sheepand cowsin order to maximize the
net returns. You have to define the restrictions to get a graphical representation of this
problem. With the objective function you can find the optimal solution. Some sensitivity
analysescanbe carried out to seethe effect of changes in net returns. Thewhole exercise takes
approximately 40 minutes.
6.4 A more realistic application to herd calving pattern
6.4.1 Outline of the linear programming model

Jalvingh (1993) developed adynamic probabilistic simulation model for dairy herds.The
model simulates the technical and economic consequences of decisions concerning
production,reproduction,replacement andcalvingpattern andcanbetailored to individual
farm conditions.Theuser has, for instance,the possibility of comparing different calving
patterns and studying the effects on gross margin and labour. From this comparison the
user hastochoose thecalving pattern that suits the objectives best.This is not necessarily
the optimal calving pattern for that specific farm. Theoptimal calvingpattern ofaherd can
be derived by combining the results of the simulation model with linear programming.
The basic ingredients of thelinear programming arethe technical and economic results of
the twelve so-called single-month equilibrium herds (SME-herds). An SME-herd
represents aherdinwhichallheifers calveinthesamemonth.Theresultingherd dynamics
76
are based on biological variables on the one hand (eg, conception rate and oestrus detection
rate) and management strategies on the other (eg, insemination and replacement policy).
Input variables of performance and prices are combined with the information on herd
dynamics to obtain the technical and economic results of each SME-herd. The technical and
economic results of any herd can easily be obtained by weighing the results of the twelve
SME-herds according to the proportion of heifer calvings per month. The technical and
economic results of the twelve SME-herds and the weighing of the SME-herds form the
basic ingredients of the linear programming problem. The major results of the SME-herds
are given in Table 6.1. The major input variables used to determine the results of the SME-
herds are in Appendix 6.1.
The linear programming problem uses the number of heifers calving per month as decision
variables. The objective is to choose the number of heifer calvings per month so as to
maximize gross margin of the resulting herd, with the restriction that the annual milk
production of the herd should not exceed the available milk quota. The following linear
programming problem can be formulated:
12
Maximize Z = X gmjXj
i=l
subject to
12
X mpjXj < quota
i=l
where
Xj = number of heifers calving in month i;
girij = gross margin of the SME-herd expressed per heifer calving, in case the
heifer calves in month i (see Table 6.1); and
mpj = milk production of the SME-herd expressed per heifer calving, in case
the heifer calves in month i (see Table 6.1).
As can be seen, the coefficients of the objective function and the constraint are derived from
theresults of the SME-herds. For that reason, the results of the SME-herds are expressed per
calving heifer (Table 6.1).
The optimal solution of the linear programming problem represents the optimal heifer
calving pattern. The optimal herd calving pattern and the corresponding technical and
economic results can be derived by weighing the results of the SME-herds according to
the optimal heifer calving pattern.
The linear programming problem just presented is referred to as set I. This set can be
extended by adding other constraints. The optimal herd calving pattern was also determined
for two different sets of additional constraints.
77
Chapter6
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78
In set II, an additional restriction is used, which specifies that all replacement heifers
entering the herd should come from heifer calves that were born in the herd 24 months
before. Thiscanbeformulated intwelveconstraints:
12
S fjXijXj ^x:, for allj
i=l
where
Vjj =number of herd calvings inmonthj in SME-herd corresponding to one
heifer calving inmonth i;and
f: =factor representing thenumber of 24-month-old replacement heifers per
calving in monthj that becomes available in monthj 2years later (f:is
setat0.4for allmonths).
All replacement heifers are assumed tocalve at the age of 24months,but this age at first
calving caneasily bechanged toinclude variation.
Aconcentration of calvings within afew months resultsin alarge variation inthe monthly
herd size.Inset III, variation in monthly herd sizeisrestricted byusing alower and upper
limitbetweenwhichmonthlyherdsizeisallowedtovary.Thelimitsareformulated interms
of aproportion of theaverage annual herd size.In formula:
12 12
S ns ij x i > Z min ahSjXj, for allj
i=l i=l
12 12
XhSjjXj< Xmax ahSjXj, for allj
i=l i=l
where
hsjj =herd sizeof SME-herd inmonth j , incase oneheifer calves inmonth i;
ahsj =average annual herdsizeinSME-herd,incaseoneheifer calvesin month
i (seeTable6.1);
min =lower limit of the variation in herd size per month, expressed as a
proportion of the average annual herd size;and
max=upper limit of thevariation inherd sizeper month.
The lower and upper limits for variation in monthly herd sizes are set at 95 and 105%of
the annual average herdsizerespectively.Theconstraints used insetIIalsohold for setIII.
6.4.2 Results
The optimal heifer and herd calving patterns for the different sets of constraints are
presented in Table 6.2, together with the technical and economic results of the herds.
79
Chapter 6
Table 6.2 Results of the optimum herd calving pattern for different sets of constraints
Set of constraints
I II III
Milk production herd (kg) 500000 500000 500000
Calving pattern heifers (%)

January 0.0 00 00
February 0.0 0.0 0.0
March 0.0 0.0 0.0
April 0.0 00 00
May 0.0 00 00
June 0.0 0.0 13.7
July 0.0 23.9 21.8
August 100.0 32.4 23.7
September 0.0 37.2 10.2
October 0.0 6.5 19.6
November 0.0 0.0 9.6
December 0.0 0.0 0.0
Calving pattern herd (%)

January 1.6 2.1 2.6
February 0.9 1.1 1.5
March 0.5 0.6 1.0
April 0.6 0.8 1.6
May 1.8 2.1 4.3
June 4.9 5.5 10.6
July 13.1 16.4 15.0
August 43.2 22.2 16.4
September 14.5 25.5 15.5
October 10.2 13.2 16.8
November 5.6 6.6 10.1
December 3.1 3.9 4.6
Average number of cows 72.6 72.1 71.7

Range herd size (%of average) 87-117 90-113 95-105
Number of calvings 84.3 83.7 83.0
Annual culling rate(%) 31.7 31.8 32.0
Calving interval (days) 373 372 372
Milk per averagi ; cow (kg) 6891 6932 6972
Average monthly deviation in base price milk 0.73 0.73 0.59
(US$/100kg)
Economic results (US$/100 kg of milk)

Revenues - milk 46.91 46.87 46.66
- calves 3.41 3.33 3.31
- cullings 3.85 3.86 3.88
Costs - feed 12.45 12.43 12.36
- heifers 6.74 6.72 6.70
Gross margin 34.98 34.91 34.78
Gross margin herd (US$) 174913 174551 173922
80
As expected, the highest gross margin per 100kg of milk is realized when only the milk
production of the herd is restricted (set I).In that case, all heifer calvings take place in
August,whichcouldbeexpected from theinformation presented inTable6.1.Theresulting
herd calvings, including heifer calvings, take place mainly from July to October. The
proportional monthly milkproductionvariesfrom 4.3% inJuneto 11.3%inSeptember.The
variation in monthly milk production is much smaller than the variation in monthly herd
calvings. The monthly herd size, expressed as apercentage of the average annual herd
size,varies from 87%inJuly to 117%in August.
If the number of heifers calving per month is restricted by the number of heifer calves
born in the herd in each month (set II), heifer calvings occur from August to October.
The resulting herd calvings are still concentrated in theperiod from August to October.
The gross margin is reduced by only US$0.07 per 100kg of milk, which is US$362 at
herd level. The reduction in gross margin is a result of the reduction in milk and calf
revenues. The milk revenues are reduced because of the reduction in average-realized
monthly deviation inthebaseprice ofmilk,whereas therevenues from calves are reduced
because of thereduction inthe number of calvings inthe herd. In set II,the monthly herd
sizevaries from 90%inJune to 113%in September of the average annual herd size (Table
6.2).
In set III,the monthly herd size isrestricted tovary between 95 and 105% of the average
annual herd size,resulting in an optimal heifer calving pattern that is spread over alonger
period than insetII.Thegrossmargin isreduced byUS$0.20per 100kgofmilk compared
with set I,which equalsUS$991atherdlevel.
Theoptimalherdcalvingpatterncanalsobedeterminedforherdswithalowerreproductive
performance, or different prices, performance etc. Only a few constraints have been
demonstrated in this chapter. However, it ispossible to include other constraints, such as
restrictions onroughage supply or available labour, aswell.The objective function of the
problem can alsobe modified. Gross margin of theherd canbemaximized while herd size
rather than the annual milk production isrestricted (ie,for asituation without amilk quota
system).

Linear programming is a very useful tool in finding the optimal solution for complex
problems. The technique has not muchbeen applied yet in animal health economics. The
reason for that mightbeunfamiliarity with thetechnique orthat itisnotconsidered useful.
Linear programming has several clear underlying assumptions (limitations). Many
modifications havebeenmadetothetechniquetodealwiththeselimitations,suchasmixed-
integer, nonlinear and quadratic programming. As aresult of the advances in computer
technology (higher speedandlargermemory capacities),computing facilities arenoweasily
available foreverybody.Furthermore,recently developed interactivemenu-driven packages
may greatly facilitate the application ofthesetechniques.
81
Chapter6
References
Boehlje, M.D. &Eidman,V.R., 1984.Farm management.John Wiley &Sons,New York, 806pp.
Dent, J.B., Harrison, S.R. &Woodford, K.B., 1986. Farm planning with linear programming:
concept and practice. Butterworths, Sydney, 209pp.
Heady,E.O.&Chandler,W., 1958.Linearprogramming methods.TheIowaState University Press,

Ames, 597pp.
Hillier,F.S.&Lieberman,G.J., 1990.Introduction tooperationsresearch.McGraw-Hill, New York,

954 pp.
Department of Farm Management and Department of Animal Breeding,Wageningen Agricultural
82
Linear programming to meet managementtargets and restrictions
Appendix 6.1
SeeJalvingh (1993) for more details on input variables and for acomplete overview. The
given input values are assumed to represent typical Dutch herds, but they can easily be
modified tosuitother farm andpriceconditions.
Herd dynamics model

Proportions of first inseminations for months 2to 5after calving are 44,41,11 and4%
respectively. After second calving and later these proportions are 49, 38, 10 and 3%.
Conception rate after insemination depends on lactation number. Conception rate per
lactationnumberweighed accordingtoanaverageherdcompositionresultsin62%.Oestrus
detectionrateis70%. Probability ofinvoluntary disposal is 12%inlactation 1 and increases
to 23% inlactation 10.
Performance model
In Table A6.1 the baseprices of milk, calves, replacement heifers and carcass weight are
presented, together withthemonthly deviation inprices.InTableA6.2energy content and
price of grass,silageandconcentrates arepresented. In summer (May-October) cows feed
ongrass andconcentrates. Inwintertherationconsists of silageand concentrates.
TableA6.2 Energy content and prices of different kinds of feed

Energycontent (VEM) a Price(USS/IOOO VEM)
Grass 951 0.122

Silage 850 0.167
Concentrates 1045 0.194
a
VEM =Dutch Feed Unit; 1000VEM=6.9MJ NE L
83
Chapter 6
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84
Dynamic programming to optimize treatment and
replacement decisions
R.B.M. Huime 1 ), A.A. Dijkhuizen 1 ), P.van Beek2) &J.A. Renkema 1 )

Netherlands
2) Department of Mathematics, Wageningen Agricultural University, Wageningen, the
Netherlands
Objectives
• themethodological aspects of treatment andreplacement decisions in livestock
• thebasicprinciples of dynamicprogramming tosupport these decisions
7.1 Introduction
Commercial livestock farms produce eitherproducts extracted from the animals over their
lives (such asmilk, eggs and wool),orthemeat harvested atthe end of the animals' lives
(such asbeef,pork and chicken), or both. Necessary inputs include feed and veterinary
treatment. Decisions have tobe made onthe quality, quantity and timing of the feed and
veterinary inputs.The product return tothese inputs changes continuously over the life of
theanimals.Typically,productivity oftheanimalsfirst increasesandthendeclineswithage.
If the livestock enterprise is tobe acontinuing one, adecision must be made on when to
replace breeding females.
Furthermore, incase of disease,farmers are frequently faced with theproblem whether to
treat or replace an affected animal.The cost-value trade-off is then important. Will the
animal recover completely and will itreach itsprevious production level? If so,how long
doesittakebefore theanimalisatitsnormallevelagain?Anotherimportantquestion inthis
respect istherepeatability ofdisease.Allthesefactors havetobebalancedbefore the farmer
can make anappropriate treatment orreplacement decision.
In section 2of this chapter some methodological aspects of treatment and replacement
decisions at the animal level are reviewed. In section 3, the technique of dynamic
programming (DP), which can be used to optimize these multi-stage decisions, is
introduced. Lastly,twoDP-applications are presented, the first onebeing an application to
dairy cows,andthe second oneinvolving sows.
7.2 Methodological aspects

The technique for determining optimal livestock replacement decisions relies on the
85
Chapter7
production function approach asexplained in Chapter 2and depends on the shape of the
marginalnetrevenuecurve(ie,thenetrevenueineachadditionalyear,monthordayof life),
thecharacteristicsofreplacement animals,thediscountrateandwhetherornot involuntary
replacement takes place.The net revenues from not only the animals present in the herd
but rather from thepresent and all subsequent (replacement) animals are tobe maximized.
This implies that an infinite planning horizon has to be considered in the marginal net
revenue approach. For simplicity reasons assume that there is no discounting and
involuntary replacement, and that net revenue isrepresented as afunction of time (Figure
7.1).
T3 Time
Figure 7.1 Determination of the optimal time for replacement in a situation without an
alternative opportunity (T3), and in situations of identical replacement (T2) and
nonidentical replacement (T1)(derived from VanArendonk, 1985)
Furthermore, assume thatthedecision problemis howlong thelivestock unit istobekept.

The answer depends onthe three opportunities available at the moment(s) at which the
unit canbe replaced.
Iftherearenoreplacement animals available atthedecision moment,therelevant objective
ismaximumnetrevenue,whichcorrespondswiththeoptimaltimeforreplacement T3.This
represents the situation inwhich there arenoopportunity costs.
If there are identical replacement animals available,the optimal time for replacement is
T2. T2 corresponds with the time at which the marginal net revenue from the present
animal(s) equals the expected maximum average net revenue from the subsequent
replacement animal(s) ( y m a x ) . The maximum average net revenue from subsequent
replacement animal(s),which isused to determine the optimal time,can be interpreted as
the opportunity costof postponed replacement.
86
Dynamic programmingto optimizetreatment andreplacement decisions
Lastly, ifthere are nonidentical (better) animals available, theoptimal replacement time is
Tl. Tl corresponds with the time at which the marginal net revenue from the present
animal(s) equals the expected maximum average net revenue from the subsequent
nonidentical replacement animals (y'max).
When there istimepreference of net revenue, comparison of expected costs and revenues
should be made at the same point in time. This can be achieved by discounting future
costs andrevenues, asexplained inChapter 3(section 5).When discounting is applied,the
optimaltimetoreplaceisreached whenthemarginalnetrevenuefromthepresent animal(s)
isequaltothemaximum annuityofexpected netrevenuesfrom thesubsequent replacement
animal(s).Inthe latter value,themarginal netrevenues andperiods oftimeare weighed to
allow for time preference. A higher discount rate can result in both later and earlier
replacement, depending onthe shape of the marginal netrevenue curve.
Themarginalnetrevenuetechnique isexplainedbyasimplecalculationmodel(ie,identical
replacement, nodiscounting, but including involuntary disposal) for fictitious animals.In
calculating the optimal lifespan for individual animals, the opportunity costs must be
determined first. The calculation isbased on the average performance of animals present
in theherd, assuming this tobe the best estimate for expected future net revenue of young
replacement animals.Futurerevenues andcosts areweighed withtheprobability of animal
survival.Theformula is:
ANRj = (Xi=1__j P i xMNRj) / ( S i = 1 j P i x y
where
ANR: =expected average net revenue peryear;
i =decision moment of retention orreplacement (l<i<j), which is atthe
end of period i;
j =period, atthe end ofwhich an animal canbe replaced;
Pj =probability of survival until the end of period i, calculated from the
moment atwhich the young animal starts itsfirstproduction (end of
period0);
lj =length ofperiod i(inyears);and
MNRj =marginal net revenue inperiod iincluding acorrection for change in
slaughter value andfinancialloss associated with disposal.
In Table 7.1,the formula has been applied to fictitious animals. The price of a highly
pregnant replacement animal isUSS500.The average net revenueismaximal attheendof
period 5 (at decision moment 5). The optimal moment for replacement with identical
animals is also at the end of period 5:the economically optimal lifespan is the last period
with apositive difference between expected marginal net revenue of the present animal
and maximum averagenet revenue of its replacement.
87
Chapter7
Table 7.1Calculation model for identical replacement of a fictitious animal (all monetary
values in US$)
Decision Marginal Slaughter Financial Marginal Probability Marginal Average RPO
moment i net value lossat probability ofsurvival net net
(yr) revenue3 disposal ofdisposal untilyeari revenue" revenue
c
o 500 Oh
1 200 345 60 0.15 1.00 36d 36f 212'
2 285 380 85 0.20 0.85 303 e 1598 157
3 320 390 88 0.25 0.68 308 199 86
4 325 375 90 0.30 0.51 283 213 27
5 305 350 93 0.40 0.36 243 2161 —
6 250 300 — 1.00 0.21+ 200 215 —
3.61k
a
Between the end of period i-1 and i, excluding change in slaughter value and financial loss at disposal
" Between the end of period i-1 and i, including change in slaughter value and financial loss at disposal
c
Young highly pregnant animal, about to start its first production
d
200 + (345- 500) -(0.15 x 60) = 36
e
285 + (380 -345) -(0.20 x85) = 303
f
(1.00x36)/1.00 = 36
S (1.00 x 36+ 0.85 x 303) / (1.00 + 0.85) = 159
h
1.00 x(36- 216) +0.85 x(303 -216) + ..+0.36 x(243 -216)= 0
1
0.85/0.85 x (303 -216) +0.68/0.85 x(308 -216) + ..+0.36/0.85 x(243 -216) = 212
J opportunity cost
k
total herd life
After an animal's optimal lifespan has been determined, the total extra profit to be
expected from trying to keep her until that optimum, compared with immediate
replacement, can be determined taking into account the risk of premature removal of
retained animals.ThistotalextraprofitiscalledRetentionPay-Off (RPO)andiscalculated
as follows:
RPOi=I j = i + 1 r P j (MNRj -ANR m a x xlj)
where
RPOj =Retention Pay-Off atdecision moment i;
r =optimal moment for replacement;
Pj =probability of survival until the end of period j , calculated from
decision momenti;
=length of periodj (inyears);
J
MNRL =marginal net revenue inperiodj;and
J
ANR m o v =expected maximum averagenetrevenue peryear.
88
Dynamic programming to optimize treatment and replacement decisions
TheRPOisaneconomic index,which makes itpossible torank animals according totheir

future profitability: thehigher theRPO,themore valuable the animal.A value below zero
means that replacement is the most profitable choice.RPO also represents the maximum
amount of money that should be spent in trying tokeep an animal in case of reproductive
failure orhealthproblems.
Applied tolivestock, themarginal net revenue approach faces twospecific problems:

• Forthecalculation oftheopportunitycostofpostponedreplacementitmustbeassumedthat
all subsequent replacement animals are identical with respect to net revenues. This
assumption makesitimpossible toaccount -directly -for continuous genetic improvement
andseasonal variation.
• Variationinexpectedperformances ofbothpresentandallsubsequentreplacement animals
isnottaken into account.
Extension of the marginal net revenue approach to overcome these limitations results in
what is called the dynamic programming (DP) technique. DP isconsidered abetter and
moreflexibletool for determining treatment andreplacement decisions in livestock, and is
introduced inthe next sections.
7.3 Briefintroductiontodynamicprogramming
Dynamic programming (DP) is amathematical technique which is especially of value in
situationswhereasequenceofdecisionshastobemade,asisthecasewithlivestockreplace
ment decisions. DP uses the repetitiveness of the decisions to save computation time. It
dependsonadeceptively simplebutremarkably powerful principle.Itisgenerally referred
to asBellman's Principle ofOptimality (Bellman, 1957):
Anoptimal policy hastheproperty that,whatevertheinitial stateand initial decision

are, theremaining decisions must constitute an optimal policy with regard to the
stateresulting from thefirst decision.
InDPapolicyisdefined asasequenceofdecisionstaken atdifferent stages. Consider the

caseofafinitehorizonwithNstages.Ateachstagethesystemcanbedescribed completely
by a state variable S n .The states arethevarious possible conditions in which the system
mightbe(eg,pregnantoropen)atthatstageoftheproblem(eg,3monthsafter parturition).
Theactiontobetakenatstagenisthedecisionvariable,denotedbyX n .Finally,thereisthe
objective function. This is defined for each stage and is the value of the function
appropriate for that stage and all subsequent stages. In the deterministic dynamic
programming model,where all the subsequent outcomes areknown for certain, the value
of the objective function is an expression of all the decision variables still to be taken
togetherwiththevalueofthecurrentstatevariable.SupposethatC n (Xn )isthevalueofthe
objective between stages n and n+1 when action X n is taken. Bellman's principle of
optimality nowpermits astatement ofthe problem interms of its optimal policy.
89
Chapter 7
ChooseX n sothat
/ n (S n ) =Opt{C n (X n ) + / n + 1 ( S n + 1 ) }
where S n + j is aknown function of Sn and Xn and Opt isminimizing or maximizing as

appropriate.
The solution procedure in a DP-model usually begins from the most remote stage (as the
form of the equations imply) and works backwards to the present. So,first /NCSJ^) is
determined,withNdenotingtheendoftheplanninghorizonorthelast stage.After that,the
stagenumber nis decreased by one (ie,N-l), the next / N _ I ( S N _ I ) function is calculated
by using the value for f^(S^) that hasjust been derived during the previous iteration.
Thisprocesskeepsrepeating until themodel finds theoptimalpolicy starting atthe initial
stage (n=l). The variable Sj is the known initial state, and ƒ1(Sj) is therefore the total
objectivewhichistobeoptimized. Ateachstagetheoptimaldecision isdetermined for all
combinations of the state variables, which specify the state of the process (eg, age and
production incaseoflivestock).
Consider the following DP-example aboutfindingtheleast-cost path through the network
showninFigure7.2.
(2,1) (3,1)
(1.1)—I (4,1)
->- (2,2) (3,2)
Figure 7.2A least-cost network problem
Nodeshavebeendesignated (i,Jj),whereiisthedecision stageandJjthestatenumber.The

optimal path must start at (1,1) andend at (4,1).Inter-node costs,or negative stagereturns,
areshown besidethe linking decision arrows.Auseful system for solving DPproblemsby
hand is the preparation of a series of tables, one for each stage, starting with the final
decision stage(Table7.2).Eachtablehasarowforeachfeasible state.Againsteach feasible
state,thetotalcost totheend of theplanninghorizonis shown.Total costisthe sumof the
stage costs and the optimal (least) costs to theplanning horizon from the state accessed at
the next stage.The lasttwo columns of the table show optimal (least) total costs and the
optimaldecision associated withit.Theprocedureisdemonstrated forthenetwork problem
ofFigure7.2 inTable7.2.
The first row inTable 7.2 consists of the costs from node (4,1) to the end of the planning
90
Dynamic programming to optimizetreatment and replacement decisions
horizon (4,1),being zero.The second rowconsists of thecost of linking nodes (3,1) -(4,1)
and (3,2) -(4,1),being 8and 6respectively. The third row consists of the cost of linking
nodes (2,1)-(3,1)being 7(stagecost)plus 8(optimal costbetween (3,1) and (4,1)),which
equals 15.The second possibility here consists of the cost of linking nodes (2,1) -(3,2),
being 2 plus 6 equals 8. The least cost of moving from (2,1) to (4,1) therefore is the
minimum value of [15,8]=8via(3,2),asdepicted inthelasttwocolumnsofthethird row.
Other rows aredetermined inthe sameway.
Table 7.2 DP-solution procedure for the least-cost network problem

Node Coststo next node Leastcosts Optimal nex
(4,1) 0 -
(3,1) 8 (4,1) 8 (4,1)

(3,2) 6(4,1) 6 (4,1)
(2,1) 7+8= 15(3,1) 2+6=8(3,2) 8 (3,2)

(2,2) 3+8= 11(3,1) 6+6= 12 (3,2) 11 (3,1)
(1,1) 4+8= 12(2,1) 2+11= 13(2,2) 12 (2,1)
Table7.2 showsthattheleast-costpathfrom (1,1)to(4,1)incurs acostof 12. Theleast-cost

pathitself is found bytracking forward throughthetable.Thetable showsthat (2,1) should
succeed (1,1),and (3,2) should succeed (2,1).The optimal sequence of nodestherefore is
(1,1) (2,1) (3,2) (4,1),with associated cost4+2+ 6=12.
So far all costs and demands have been assumed tobe known for certain (deterministic
approach). Often this is not realistic, however. In livestock production, for instance, the
unpredictable nature of the data should be taken into account. Stochastic DP requires the
same fundamental assumptions as the deterministic approach. Ateach stage there is an
explicitly known state variable S n . The decision variable is again denoted by X n , but
whereas inthe deterministic model S n and X n lead to aunique state variable S n +j at the
nextstage,instochasticDPthereisaprobabilitydistribution,dependentonS nandX n , over
the next state variable. The cost of the stage, C n (X n ), is usually assumed to be known
without error. The equivalent form of the fundamental equation replaces the term
fn+\(Sn+i), which would otherwise be arandom variable, with itsexpected value.Thisis
the weighed average of all possible values of / n + l ( S n + i ) , where the weights are the
corresponding probabilities.This iswritten as£t/n+i(S n + i)]. Now X n istobe chosen so
that
f n (S n ) =Opt (C n (X n ) + £[/ n + 1 (S n + 1 )]}
DPhastheadvantageofplacing norestrictionsonthenatureofthe functions usedto specify

the structure of the system. So, linear as well as nonlinear relationships can be included.
Furthermore it ispossible to alterparameter values over time,offering the opportunity to
91
Chapter 7
include,forinstance,seasonalityandcontinuousgeneticimprovement.Inthefieldofanimal
health economics, DPhasbeen used most extensively in culling decisions in dairy cattle
(see VanArendonk, 1985;Kristensen, 1993;Houben, 1995)and insows (Huirne, 1990).
7.4 Application of dynamic programming to replacement decisions in dairy cows

In thecaseof dairy cows,major revenues andcostsdiffer with ageand stage of lactation.
Simultaneous consideration of all these -biological and economic -variables and their
interrelationship iscriticalfor makingaccuratereplacement decisions.Decisions toreplace
individual animals are mainly based on economic rather than biological considerations
under the condition that the size of the herd must remain constant. The farmer replaces a
cow whenahigherprofit istobeexpected from itsreplacement.
The simplest DP-formulation of thereplacement problem hasone state variable, lactation
numberS natstagen,andthedecisionoptiontokeepthecowfor atleastonemorelactation,
or replace the cow with aheifer that is about to start its first lactation (Kennedy, 1986).
Thedecision stageisthestartofeachlactation.NetreturnsoverthelactationR n (S n ) depend
on the cost of feed, theprice ofmilk andthepriceofcalves.Ifthedecision istokeep the
cow,andthelactation issuccessful, thestate atstage n+ 1 is2.Thereturn from the saleof
the culled cow isdenotedbyL n (S n ), andthecost ofthereplacement heifer by C n .
The lactation of thecow maybeunsuccessful either because of failure due tolow yield or
a disease problem, or because of the death of the cow. If the lactation is unsuccessful,
replacement isforced. Inthe case offorced orinvoluntary replacement because of failure,
which hasaprobability of PF(Sn), itis assumed that the stage net return is still R n (S n ). In
the case of involuntary replacement because of death,which has aprobability of PD(S n ),
it is assumed that the stagenet return is alsoR n (S n ) but noreturn isrealized from the sale
ofthecow.Theprobability ofasuccessful transition from lactationS ntoS n + 1 is therefore
(1 -PF(Sn) -PD(Sn)) denoted by PS(S n ). The discount factor is symbolized with 5. The
recursive equation for maximization of thepresent valueofexpected net revenue is;
V n (S n ) =max [VKn(Sn), VRn(Sn)] (n=N-1......1)
and
V N (S N ) =L N (S N ) (n=N)
where
VK n (S n ) =R n (S n ) +S[PS(S n )V n+1 (S n +l) + (PF(Sn) +PD(Sn)}
x V
{ n+l(D-C n+ 1} +PF(S n )L n + 1 (S n + l)]
for thedecision tokeepthecow for atleastonemorelactation;and
VR n (S n ) =L n (S n ) -C n +R n (l) +5[PS(l)V n+1 (2) + {PF(1)+PD(1)}

*{V n + 1 (l)-C n + 1 }+PF(l)L n + 1 (2)]
92
Dynamic programmingto optimizetreatment andreplacement decisions
for the decision to replace thecow with another onethat is about tostart its first lactation.
After the optimal lifespan of acow is calculated in this way, the model can be used to
determine theRetention Pay-Off (RPO)foreachindividual cow:
RPO(Sn)=VK n (S n ) -VR n (S n )
Theabove-mentioned equationsmustbeextended andreformulated toobtain areal-life DP-

application. Statevariables additional tolactation numberwhich maybeincluded are stage
of lactation, moment of conception, month of calving, and perhaps most importantly, milk
production level during previous andpresent lactations.Clearly, extending the number of
state variables resultsin anincreased complexity of theDP-equations.
Results of adairy herdreplacement modelarepresented below.Itisastochastic DP-model
inwhich the state variables include lactation number, stage of lactation, milk production
during previous andpresent lactations,andtimeofconception.Thecalculated RPO-valües
for typical -Dutch -conditions are given in Table 7.3,calculated for cows that havejust
become pregnant atthreemonths after calving.
Table 7.3Retention Pay-Off (RPO) of cows that have just become pregnant at three months
after calving (inUS$)
Lactation Relativeproductionlevelofc o w a
80 90 100 110 120
1 _b 100 350 575 825
2 50 200 500 750 1075
3 75 225 525 800 1150
4 75 200 475 750 1075
5 50 150 400 675 975
6 25 100 325 575 875
7 - 25 225 450 725
8 - - 100 325 575
a
Relative toherd average atMature Equivalent (%)
" AnRPO-valuebelow zero
AscanbeseeninTable7.3, afirst calvingcowwithanaverageproduction level(100%)has

anRPOof US$350 atthree months after calving.This isthe financial loss should thiscow
be replaced for some reason. RPO also represents the maximum amount of money that
should be spent in trying to keep her.RPO increases considerably for cows with higher
productionlevels.Acowinthirdlactationwitharelativeproduction levelof 120% haseven
anRPOof US$ 1150.TheRPOofpoor-producing animalsdeclines sharply.Afirst lactation
cow with aproduction level of 80%has anegative RPO,which means that replacement is
the mostprofitable option. Should such acow notbe culled in itsfirst lactation and should
keepproducing at 80%level, then its RPO from the second lactation onwards isjust high
93
Chapter 7
enough toremain intheherd untilits7thlactation.

Values shown inTable7.3 arevalidfor cowsthatbecome pregnant at anormal moment in
lactation.When thisisnotso,thefarmer hastomake achoicebetween thefollowing (bad)
options: (1) to re-inseminate the cow and accept the loss due to an increased calving
interval, or (2)toreplace the cow and accept theloss associated with premature disposal.
In Table 7.4,results arepresented for three different moments of decision:three,five and
seven months after calving.Moreover, twodifferent breeding outlooks areconsidered: (1)
anoptimistic outlookthatassumesthatthecowwillhavenormalprobabilitiesofconceiving
in future lactations, and (2) a pessimistic outlook that assumes that the cow's fertility
problems will recur.
Table 7.4 Critical production levels below which it isnot profitable to inseminate empty cows
Decision Minimumcalving Production levelcowinlactation'3
moment3 interval (months) 1 2 3 4 5 6 7 8
Optimisticbreeding outlook
3 12 86 86 88 90 92 94 98 102
5 14 90 90 92 96 98 100 104 110
7 16 96 96 98 102 104 108 112 118
Pessimistic breeding outlook

3 12 86 86 88 90 92 94 98 102
5 14 100 100 100 102 104 106 108 114
7 16 120 114 114 116 116 118 120 124
a
Months after calving
° Relative toherd average atMatureEquivalent(%)
The results inTable 7.4 indicate that from an economic point of view cows in their first
lactation thatproduce less than 86%of herd average should not beinseminated any more
at three months after calving. Assuming a normal distribution of production, and a
phenotypic intra-herd standard deviation of milkyield of 12%,this result implies that 12
to 13% of first lactation cows should be culled for insufficient production capacity. At five
months after calving,theproduction level shouldbeatleast 90%tojustify insemination of
non-pregnant animals, and the limit is 96% at seven months in lactation. So, from an
economic point of view young animals with ahigh production level can be inseminated
several times.For older cows, the critical production level is higher because of various
factors, including the sharply increasing probability of involuntary disposal in future
lactation and the continuous genetic increase in milk production. The critical production
levels are strongly increased when recurrent fertility problems are to be expected
(pessimistic breeding outlook),especially at moments of decision later in lactation. The
influence decreaseswithahigherageofthecowconcerned,becausetheremainingexpected
life hasdecreased, and hence theexpected number of future calvingintervals.
94
Dynamic programming to optimizetreatment andreplacement decisions
7.5 Application of dynamic programming to replacement decisions in sows

Theapplication ofDPtosowsisvery similartothatofdairycowsand,therefore, discussed
only briefly. The simplest DP-formulation of the sow replacement problem has one state
variable,paritynumberS natstagen,andthedecisionoption tokeepthesowfor atleastone
more parity, or replace her with areplacement gilt that isabout tostart its first parity. The
decision stageisthe start ofeachparity,ie,themoment ofweaning the piglets.Net returns
over parity R n (S n ) depend onthe feed and the price of feeder pigs sold. The return from
thesale oftheculled sow isdenoted byL n (S n ), andthecost of thereplacement gilt by C n .
The definition and probability of forced or involuntary replacement because of failure
(PF(S n )), of involuntary replacement because of death (PD(S n )), and of a successful
transition from parityS ntoS n+ 1 (PS(Sn))aresimilartotheapplication todairycows.The
recursive equations for maximization of the present value of expected net revenue, as
presented intheprevioussection,arealsovalidfor thesowreplacement problem.Toobtain
a real-life DP-application, these DP-equations must also be extended. Additional state
variables aremoment of conception andpigletproduction levelduring thelast and second
lastparity.
Theresultsofareplacementmodelfor sowsarediscussed.Thestatevariablesincludeparity
number, litter size (number of pigs born alive) during the last and second last parity, and
moment of conception. The average RPO-values for various sows at the first time of
breeding after weaning aregiven inTable7.5.
Table 7.5Retention Payoff for sowspregnant at the first moment of conception after weaning
(inUS$)
Pigs Relative production level of sow
Parity born alive3 50% 75% 100% 115% 130%
1 9.6 20 65 110 135 165
2 10.3 _b 40 110 150 190
3 10.8 - 20 90 135 180
4 11.1 - - 70 115 155
5 11.2 - - 50 90 135
6 11.1 - - 30 70 110
7 11.0 - - 15 50 90
8 10.9 - - 5 35 70
a
Parity-specific averages intheherd (= 100%)
" AnRPO-valuebelow zero
As could be expected alonger herd life is especially profitable for the better-producing
sows. Table 7.5 also shows that strong selection in theearlier parities is economically not
worthwhile. Even sowsthat produce 50%below average should not be culled on strictly
economic groundsbefore their second parity.The key factor here isthe low repeatability
of litter sizeasapredictor of future performance ofsows.
95
Chapter7
The critical production levels below which it isnot profitable to (re)breed sowsthat fail to
conceive arepresented inTable 7.6.Results consider the optimistic breeding outlook only,
assuming noexpected repeatability of fertility problems infuture parities.
Table 7.6Critical production levels below which it isnot profitable to breed empty sows
Parity Pigsborn alive 3 Breeding 1 Breeding 2 Breeding 3 Breeding 4
1 9.6 40b 40b 66 85
2 10.3 47 57 77 98
3 10.8 58 70 93 115
4 11.1 69 88 110 134
5 11.2 82 101 125 144
6 11.1 88 110 133 150b
7 11.0 98 117 142 150b
8 10.9 100 124 147 150b
a
Parity-specific averages intheherd (= 100%)
" Lower (40%)and upper (150%)production levelused inthe model
Average-producing sows (ie, 100%) in the first and second parity can be allowed at least
three rebreedings before replacement becomes more profitable. As could be expected the
critical production level below which rebreeding is not profitable any more strongly
increases with ahigher parity number. Athird rebreeding is hardly ever optimal for sows
in parities sixtoeight (critical production levelequalling -at least - 150%).
ESJSg
In Chapter 19you can find an example on dynamic programming, in which the calculation of
the optimal time of sow replacement isshown step by step. You have to use these results to
calculate the RPOof the sows according to the explanation in this chapter. You can then
change some input values for asensitivity analysis to seehow to usesuch a model for specific
purposes. Finally, the model isextended by taking into account genetic improvement of the
sows over time. Theentire exercise takes approximately 45 minutes.

Dynamic programming is a flexible mathematical technique for determining the
economically optimal treatment andreplacement decisions for dairy cowsand sows. Major
advantages of DP include the possibility of allowing for variation in, and possible
repeatability oftraits.Both therisk that ahigh-producing animal (cow or sow)may havea
low future production and the risk that an animal may be replaced with a low-producing
replacement animal can, therefore, be taken into account. However, the DP-model easily
becomes very large. This results in a high memory request and high computation costs.
Kristensen (1993) developed avery efficient DP-algorithm, ie,the Hierarchic Markov
Process(HMP),whichcanbeusedtooptimizerelatively largeDP-models.Houben (1995)
96
Dynamic programming to optimize treatment and replacement decisions
used the HMP-approach to include mastitis incidence in the replacement model.

The calculated RPO-values for individual cows and sows can serve as useful guides for
making replacement decisions. In case of health problems, the RPO-value of an animal
represents the maximum amount of money that should be spent in trying to get her back to
previous production levels.
The repetitive nature of the DP-algorithm makes it almost impossible to include culling
reasons that are difficult to quantify, such asmaternal characteristics. However, these can be
taken into account using expert systems that are integrated with the DP-model. First
promising prototypes for such systems have been made available for sows (Huirne, 1990).
References
Bellman, R.E., 1957.Dynamic programming. Princeton University Press,Princeton, NJ, 339pp.
management.PhD-Thesis,Department ofFarmManagement, Wageningen Agricultural University,
Wageningen, 146pp.
Huirne. R.B.M., 1990.Computerized management support for swine breeding farms. PhD-Thesis,
Department ofFarm Management, Wageningen Agricultural University,Wageningen, 165pp.
Kennedy, J.O.S., 1986.Dynamic Programming. Applications to agriculture and natural resources.

Elsevier Applied Science,London, 341pp.
Kristensen, A.R., 1993. Markov decision programming techniques applied to the animal
replacement problem. Doctoral dissertation, The Royal Veterinary and Agricultural University,
Copenhagen, 183pp.
Van Arendonk, J.A.M., 1985. Studies on replacement policies in dairy cattle. PhD-Thesis,
Department of Animal Breeding and Department of Farm Management, Wageningen Agricultural
97
8
Markov chain simulation to evaluate user-defined
management strategies
A.W. Jalvingh 1 ), A.A. Dijkhuizen 1 ) &J.A.M,van Arendonk^)

Netherlands
2) Department of Animal Breeding, Wageningen Agricultural University, Wageningen, the
Netherlands
Objectives
• thecharacteristics ofMarkov chains
• theconcepts anddefinitions of states
• thelong-run properties ofMarkov chains
The method is introduced by two simplified examples and further illustrated with an
application, simulating herd dynamics in sow herds in order to evaluate the effects of
different management strategies onthetechnical andeconomic results of the herd.
8.1 Introduction
Markovchains areusedtomodeltheevolution of systemsorprocesses overrepeated trials
orsuccessive timeperiods.Inanimalhealtheconomics,Markovchain simulation hasbeen
used most extensively toevaluatethe impact of alternative control strategies on the spread
of disease (Carpenter, 1988; Dijkhuizen, 1989). Dynamic programming is also an
application of Markov chains and is often used todetermine the optimal insemination and
replacement decisionsfor individual cows and sows (seeChapter7).
KeyissueofinterestinMarkov chain modelsisthestudy ofeventsand sequential decision
making under uncertainty. Intervals of time separate the stages at which events occur and
decisionscanbemade,andtheeffect ofadecision atany stageistoinfluence the transition
from the current and succeeding state.Central to the theory of Markov chain models are
the concepts of states andtransitions.Thedistribution of the system orprocess over states
at acertain moment can be derived from the distribution at the moment before and the
transitions possible for each state.Characteristic isthe Markovian property, implying that
a transition from state ito statej depends only on the state currently occupied (Hillier &
Lieberman, 1990).
99
Chapter 8
8.2 Markov chains in general

AMarkov chain model has two components: states and transitions. The Markov chain
represents a system or process that moves between anumber of states. The states may
constitute aqualitative aswellasaquantitativecharacterization ofthesystem.Ifthepresent
state isS n =i,then there is acertain probability that thenext state visited isS n + j = j . This
probability does not depend on the other states visited prior toentry into state i. In other
words,theconditional probability of anyfuture event,given any pastevent andthepresent
state S n=i,isindependent ofthepast event anddependsonlyupon thepresent stateofthe
process.This isreferred to astheMarkovian property (Hillier &Lieberman, 1990).This
principle can be illustrated with an example of afrog in alily pond (Howard, 1971).The
frog in this example always sits on apad; it never swims inthe water. From time to time
the frog jumps into the air and lands on the same lily pad or on adifferent one. We are
interested in the location of the frog after successivejumps. Let us assume the pond to
have afinite number of lily pads,numbered from 1 toN,here from 1 to 3(seeFigure 8.1).
The lily pads the frog can sit on represent the states in the Markov chain. The 'process'
that moves from state to state is the frog. The
'transitions' are the jumps of the frog. If this
situation is modelled as a Markov chain it means
that theprobability that the frog willjump from lily
pad 1 tolily pad 2only depends onthecurrent state
(lily pad 1) of the frog. The probability is
independent of the lily pads that the frog occupied
before it was on lily pad 1. The conditional
probabilities P{S n + j ==j i I s n = i} are called
transition probabilities and are usually denoted by
pjj. If the transition probabilities p;; are constant Figure 8.1Thelily pond
over time, they are stationary. Moreover, a Markov
chain has a finite number of states and adiscrete time parameter. Due to the Markovian
property, aMarkov chain is said to exhibit a lack of memory. However, by adding more
©© © states memory can be introduced into

the model. If, for instance, in the frog
©. example, the probability is dependent

onthepresent pad occupied and onthe
one before that, the states will have to
be reorganized. In that case we will
©
3,3
have N 2 states, each representing a
combination of two pads possible,
representing padsoccupied (see Figure
8.2).
Figure 8.2 The lily pond with memory; The distribution over states can be
(i.j); ' =7 .. 3, previous pad; j = 1 ... represented by a state vector X. A
3,present pad) convenient notation for representing
100
Markov chainsimulationtoevaluate user-defined management strategies
thetransition probabilitiesisthetransition matrix P,withelements pjj. IftheMarkov chain

consists ofthree states,thetransition matrixisasfollows:
Pil P12 P12

P= P21 P22 P23
P31 P32 P33
Pj3 represents theprobability thattheprocesswhichisinstate 1 duringperiod nwill move

to state 3inperiod n+1. Each pj; isaprobability, and thus0<py < 1, for 1 <i,j <M (M
equalsthetotalnumberofstates).Thesystemorprocessmustbeinoneofthemstates after
thetransition from any stateiandthusXjPjj =1 foralli.
The state vector attime n+1, X n + j , canbederived from the statevector attimen,X n , and
the transition matrix P: X n + 1 =X n P.Iftransition probabilities arestationary, X n + j =
XQ P(nX P^11)isdenoted asthematrix ofn-step transition probabilities. The elementsof
p( n ), pjj( n \ aretheconditional probabilities that the systemorprocess, starting instatei,
willbeinstatej after exactly ntime steps.The n-step transition probability matrix can be
obtained bycomputing then"1poweroftheone-step transition matrix. So,p(n> = PPPP
...P=P n . Soinfact,theinitialstatevector XQandthetransitionmatrixPdeterminethestate
vectorateachfollowing moment. ThecharacteristicsofMarkovchainswillbe illustrated
withtwo simplified examples.
Sow replacement
Inthefirst example,sowherd dynamics ismodelled foraherd with aconstant numberof
sows. After weaning litter i,asowmaybeculled and replaced with ayoung sowthatis
about tohaveherfirst litter,orisretained and will produce thenext litter. IntheMarkov
chain thenumberofstatesisrestricted to3: (1)sow having litter 1,(2) sowhaving litter2,
and (3)sowhaving litter 3orhigher. The possible transitions forthe Markov chainare
from S n =itoS n + j =i+1, whenthe sowisretained after weaning.Ifthe sowisculledand
replaced, thetransition from S n =itoS n + j =1willtake place.Allother transitions have
probability zero.Thenon-zerotransition probabilities areestimated from available dataon
several herds (Table 8.1).
Table 8.1Data on number of sows culled and retained

Litter Numberof sows Relative frequency
number culled retained culled retained
1 216 864 0.2 0.8
2 184 552 0.25 0.75
>3 614 1432 0.3 0.7
Thus,pj j , theprobability that asow that hadlitter 1 isculled equals 0.20. Theresulting
transition matrix isasfollows:
101
Chapter 8
0.2 0.8 0
P= 0.25 0 0.75
0.3 0 0.7
FromPitispossibletoderivep( 2 )bymultiplyingtheone-steptransitionprobability matrix

by itself, P^2) =P 2 =PP.
0.24 0.16 0.6

p(2)= 0.275 0.2 0.525
0.27 0.24 0.49
P (2),oneof theelements ofP^2)iscalculated as0.2x0.2 +0.8 x0.25 +0x0.3 =0.24.

A .p4 _ p2 p2 an( j j s g j v e n below:
0.264 0.214 0.522

p(4)= 0.263 0.210 0.527
0.263 0.209 0.528
The transition matricespresented above areused toderivethe state vector at n=1,n=2 and
n=4.Intheinitialstatevector XQ, all 100animalsintheherdaresowsthatareabouttohave
thefirst litter (XQ= {100,0,0}).Thestatevectorsatdifferent timeperiodsaregiven inTable
8.2.
Table 8.2State vector X at different time periods n (XOPn)

State State vector
*0 *1 x2 X4
1 100 20 24 26.4
2 0 80 16 21.4
3 0 0 60 54.0
Another type of representation of aMarkov chain is atransition diagram, which, for this
example,is as follows:
0.2 0.8 • -0.75- 0.7

0.25-
0.3 -
102
Markov chainsimulationto evaluate user-defined management strategies
Spread of adisease
Inthesecondexample,thespreadofacertaindisease amonganimalsinaherdis modelled.
Susceptible animals at time ncan become infected at n+1with aprobability of 0.40. The
infected animalsintimeperiod n+1become immune attimeperiod n+2(probability 0.80),
ordieowingtothediseaseintimeperiodn+2(probability 0.20).TheMarkovchain consists
of four states, (1) uninfected animals, (2) infected animals, (3) animals immune after
infection, and (4) animals that died after infection. Thetransition matrix Pis as follows:
0.6 0.4 0 0
0 0 0.8 0.2
P=
0 0 1 0
0 0 0 1
From P,P'^) andp(4)canbederived inthe same way aswasdone inthe first example.
0.36 0.24 0.32 0.08

p(2) _ p2_ p p_ 0 0 0.8 0.2
0 0 1 0
0 0 0 1
0.130 0.086 0.627 0.157

p(4)= P 4 : : p2p2: 0 0 0.8 0.2
0 0 1 0
0 0 0 1
Agraphical representation of the Markov chain canbeproduced bydrawing the transition

diagram:
[ 1
0.8 3 1.0
1 I
0.6 0.4
i
i _r 0.2 ^ 4 ;.o
8.3 Concepts and definitions of states

Thetransition probabilities associated withthe statesplay an important role inthe studyof
the system modelled by the Markov chain. Before describing the special properties of
Markov chains,some concepts and definitions concerning states arepresented.
Statej issaidtobeaccessiblefrom stateiifp^Sn^ >0for somen>0.AllstatesofaMarkov
chain are accessible when there is avalue of nfor which Pjj( n ' >0 for all iand j . In the
first example, all states are accessible, since Pjj( ' > 0 for all i and j . In the second
103
Chapter 8
example, state 1 is not accessible from state 2,ascaneasily bederived from thetransition
diagram. Also, inthe n-step transition matrix, element P2\ equals 0for all n. However,
state 2isaccessible from state 1.
States iandj are said tocommunicate when statej isaccessible from state i, and state iis
accessible from state j . Inthefirstexample,allstatescommunicate;inthe second example,
noneof them do.Ingeneral:
• any stateicommunicates withstate i,sincePjp ' =1;
• if state icommunicates with state j , then statej communicates with state i;and
• if state icommunicates with state j , and statej communicates with state k, then state i
communicates with statek.
The states of aMarkov chain canbe divided into oneormore disjoint classes. Two states
that communicate always belong to the same class.Aclass may consist of a single state
only.If all states inaMarkovchain communicate, asinthefirstexample,thereisonly one
class and such aMarkov chain is saidtobe irreducible.The second example contains 4
classes; all states form aseparateclass.
States differ in theprobability whether ornot aprocess,starting instate i,will ever return
to state i.This probability isdenoted by fjj. For arecurrent state,f^ equals 1.If fjj < 1,a
state iscalled transient. A special case of arecurrent state is an absorbing state. For an
absorbing state,the one-step transition probability pjjequals 1;once aprocess enters the
state,itcannot leave it again.
All states in aclass are either recurrent or transient, and therefore aclass is denoted as
recurrent or transient. Each finite-state Markov chain consists of at least one recurrent
class of states. The first example consists of one recurrent class of states. The second
example has twotransients classes (1and 2) and tworecurrent classes (3 and 4). Once a
recurrent class is entered, the process will never leave it again. Once aprocess leaves a
transient class,the process will never enter it again. This can easily be inferred from the
transition diagram in thesecond example.
Theperiod of astateisdefined tobe theinteger t(t> 1),such that Pj/n-* =0for all values
ofnotherthant,2t,3t,..., andtisthelargestintegerwiththisproperty.Inthetwoexamples,
there areno states with aperiod. In the following Markov chain, the transition diagram of
which ispresented, all states haveperiod2.
•1.0-
Theproof that theMarkovchaincontainsperiod 2follows from thesingle-step andmulti-

step transition matrices:
104
Markov chain simulation to evaluate user-defined management strategies
0 1
: p(3)= p(5) e t c
1 0
1 0
P (2) = : p(4)= p(6) etc_
0 1
Thus,pjj(n) =0for n=l, 3,5etc.andpjj>0for n=2,4,6etc.
8.4 Long-runpropertiesof Markovchains
For thefirstexample,the four-step transition matrix waspresented earlier. This transition

matrix canbe used toderivep(°) (=P 4 P 4 ).
0.263 0.211 0.526

p(8) = 0.263 0.211 0.526
0.263 0.211 0.526
Because allthreerows aresimilar,theprobability ofbeinginstatej after 8weeks seemsto

beindependentoftheinitialstatevector.Ifinitially allsowsareinstate 1 (XQ= {100,0,0}),
the state vector 8weeks later will beXg = {26.3,21.1, 52.6}. If theinitial state vector XQ
hadbeen {33.3,33.3,33.3},Xg would alsohavebeen {26.3, 21.1, 52.6}.
p(°) can beused tocalculate p(l°). Allentries inpO") areequal tothose in p(°). Incase
of an irreducible Markov chain, as inthe first example, limn_^00pj;Vn) = 7t:exists and is
independentofi.The7t;sarecalledthesteady-stateprobabilitiesoftheMarkovchain.The
termsteady-state probability meansthattheprobability offinding theprocessinstatej after
a large number of transitions is independent of the initial probability distribution defined
over the states and tends tothe value Jtj. Steady-state probabilities donot imply that the
processsettlesinonestate.Theprocesscontinuestomaketransitions from statetostate(the
transition probability from stateitostatej isstill pjj).
Ifthedistribution overstateshasreachedthesteady-statedistributionrepresented bythe_:s
attimen,thedistribution overstatesattimen+1isthesame.Thischaracteristiccanbeused
toderive directly thevectorY[ containing thestationary probabilities 7t;,instead of making
allthenecessary timesteps.Thefollowing setofequationsneedstobesolved:F]=FIPand
Z;ft;= 1- Forthefirstexampletheseinclude:
105
Chapter8
K] = 0.2 71j + 0.25 7C2 + 0.3 7r3

TC2 = 0.8 7tj
7t3 = 0.75 7r2 + 0.7 7C3
1 = TCj + K2 + 7X3
Solving the last four equations provides the simultaneous solutions: nj =0.263, TC2= 0.211
and 7C3 = 0.526, which are the results that appeared before in matrix p w .
When a Markov chain consists of more than one recurrent class of states, the steady-state
distribution or limiting distribution over states is no longer independent of the initial state
vector XQ. SO, lim n _ > 0 0 pj;( n ) = TCj; and is no longer independent of i. For the second
example, the transition matrix with the steady-state probabilities (P1-00-*)is as follows:
0 0 0.8 0.2
0 0 0.8 0.2
p(°°) :
0 0 1 0
0 0 0 1
If in the initial state vector all animals are susceptible (XQ = {100,0,0}), ultimately 80% of
the animals will be immune and 20% will have died. When initially 50% of the animals
are immune and 50% susceptible, then in the long run 90% of the animals will be immune
and 10% will have died owing to the disease. These figures can also be derived from the
transition diagram.
If states i and j are recurrent states belonging to different classes, then Pjp n ) = 0 for all n.
In the second example, states 3 and 4 are recurrent states belonging to different classes.
Therefore, P34*-n-' = 0 and p ^ = 0, for all n. State j is a transient state, when
lim n _^ 0 0 pjj' n ) = 0 for all i. In the second example, states 1 and 2 are transient states;
lim n _ >00 pjj(- n ) = 0 and lim n _ >00 pj 2 *- n -' = 0, for all i (see matrix above).
With the computer case on Markov chains (in Chapter 19)you canpractise the principles of
Markov chains: setting up a transition matrix and defining whether the different states are
recurrent, transient or absorbing You will also seean example of calculating the steady state
in one step, asexplained in section 8.4. After the introduction, an example with mastitis is
worked out. There are different strategies of changing the current mastitis situation in the
herd. You have to use the Markov chain approach to determine which strategy is the best.
Hereafter, the Markov chain is extended with dynamic transition rates, indicating that the
probability of infection isdependent on the number of animals infected in the previous period
(this isamore realistic, but also amore complicated way of using Markov chains). Theexercise
takes approximately 45 minutes.
106
8.5 Simulation of herd dynamics

Adynamic probabilistic model was developed in order tocalculate the effects of different
management strategies with respect toproduction, reproduction and replacement on the
technical and economic results of an individual sow herd (Jalvingh, 1993).Central in the
model isthe simulation of herd dynamicsusing amodified Markov chain.
8.5.1 Description of the Markov chain model

The sow herd is described in terms of states the animals can be in and the possible
transitions between states and thecorresponding probabilities.Talcinginto account model
objectives,timeinterval betweentransitionsissetat 1 week.Thestatesthatareincluded are
related to the (re)production cycle of the sows.Table 8.3 presents the state variables that
wereusedtodescribethestatesfrom weaningtoweaning.Tocutdownthenumber ofstates
per cycle, the number of state variables used in the second part of the gestation period is
reduced. The total number of states from weaning to weaning is 156.Furthermore, the
state variable 'cycle number' isused torepresent sowsof different ages,varying from 1 to
10.
Table 8.3 Possible values of the state variables used to describe states within a cycle of the
sow (from weaning to weaning). State variables used are dependent on stage in
cycle. Time unit in the model is 1week.
State variables3
Stage incycle ib i k |b mb
m n
Weaning -insemination 1-3

Insemination -halfway gestation 0-6 1-4 1-12
Halfway gestation - farrowing 7-16 0-1
Farrowing -weaning 1-4
a
Thefollowing statevariables areused:
i:time after weaning;
j : time after insemination;
k:time after farrowing;
I:number of inseminations performed during thiscycle;
m:interval weaning -insemination;
n:pregnant ornot.
" Upper limit number of classes depends onuser-defined input values; given number is
maximum.
By adding extra state variables to the model the production history of the sows can be
taken intoaccount. Production level atlast farrowing and production level at second last
farrowing areincluded as state variables. So,when taking decisions for individual sows,
productivity ofthesowcanbetakenintoconsideration.Boththeseextrastatevariablesvary
107
Chapter8
from 4to 16pigsborn alive.Themaximumnumberof states inthemodel is 156x 10x13

x 13= 263640.In thischapter, the statevariables referring toproduction levelwill notbe
used,leaving amodel with 156x 10= 1560states.
Foreach state mentioned above,theprobability of makingthenexttransition toeach other
state has tobe specified. Herd dynamics is aresult of the interaction between biological
variables and management strategies.Therefore, transition probabilities are dependent on
input parameters referring tobiological variables onthe one hand (eg,pregnancy, oestrus
detection and involuntary culling rates) and management strategies on the other (eg,
insemination and replacement strategies).Three categories of transition probabilities are
considered: (1)reproduction, (2)involuntary disposal,and (3)production level.
At each time step, individual animals areeither retained or culled. If asow is culled, it is
replaced by areplacement gilt (6months old).Areplacement giltcan stay inthe herd until
it is culled and replaced or until it has reached the maximum allowable litter (10 in this
case).Thefollowing transition diagramisasimplified representation of theMarkov chain,
whichhasthesamecharacteristicsasthesowherdmodel.Sowsareeitherretainedorculled.
If asow isretained, shehasthe possibility of going tomore than one state (eg, in caseof
inseminated andnotinseminated).State 1 represents thereplacement gilt.
' ~ &
— d-q)
r-s)-
- ( ! •
1 -
1 -
The transition diagram shows that all states communicate. Therefore, and when transition
probabilities are stationary, the steady-state probabilities are independent of the initial
statevector.Nomatterhowtheanimalswereinitiallydistributed overthestates,thelimiting
distribution over states isalwaysthe same.Thelimiting distribution is in fact equal tothe
distribution ofareplacement giltoverallstatesduringherlife.Thesteady-state probabilities
arerecalculatedtorepresentaherdwithacertain size.Duetotheageingofsows,only afew
transitions are possible for each state.The transition matrix has a great many rows and
columns,containingperrow,therefore, onlyacoupleofnon-zeroentries.TheMarkovchain
hasbeenprogrammed toallow for these typical characteristics.
Toevaluatetheconsequences ofchangesinherddynamics,severaltechnical andeconomic
results arederived from the distribution over states.Some variables are derived directly
from thesteady-statedistribution,suchasnumberoflitterspersowperyearandpercentage
of reinseminations. For other variables additional technical and economic variables are
needed,asinthecaseofreturns (eg,price ofpiglets andculled sow)andcosts (eg,priceof
feed andreplacement gilt).
108
8.5.2 Model results

Forabasic situation representingtypicalDutchherds,thetechnical andeconomic resultsof
the corresponding steady-state herd were determined (herd I).Appendix 8.1 presents the
major technical and economic input variables.The steady-state herd was also determined
if pregnancy rates were at a 20%lower level (herd II),and when oestrus detection rate
after first insemination was at a20%lower level (herd III).The results of thethree steady-
state herds arepresented inTable 8.4.
Table 8.4 Major technical and economical results of different steady-state herds
Herd
a
l ll a lll a
Technical results
Average number ofsows 130 130 130
Litters per sowperyear 2.32 2.17 2.30
Pigsborn aliveperlitter 10.6 10.5 10.6
Pigs sold per sow peryear 21.0 19.5 20.8
Culling rate sows (%) 49.3 69.2 51.7
Reinseminations (%) 11.5 23.7 10.0
Economicresults(USS persowperyear)
Returns
- piglets sold 1224 1138 1216
- sows and gilts culled 119 162 125
Costs
-replacement gilts 152 214 159
-feed sow 328 329 328
- feed piglets 264 246 263
Gross margin 599 511 589
Gross margin herd (US$) 77872 66416 76641
a
Herd I:basic situation; Herd II:pregnancy rates at 20% lower level; Herd III: oestrus
detection afterfirstinsemination at20%lowerlevel.
Inthebasic situation (herd I),thenumberof litters per sow peryear is 2.32,the numberof
pigs sold per sow peryear is21.0 andthe annual culling rate in sows is49.3%. Resulting
gross marginper sowperyearisUS$599.Ifpregnancy ratesareat a20%lowerlevel (herd
II), percentages of reinseminations and annual culling rate increase. This results in a
reduction in number of litters per sowper year (minus 0.15) and number of pigs sold per
sow per year (minus 1.5). The reduction in gross margin is USS88 per sow per year. If
oestrus detection rate after first insemination isat a20%lower level (herd III),fewer sows
109
Chapter 8
that have been inseminated but have not become pregnant will be seen in oestrus again.
Since oestrus detection ratebeforefirstinsemination and pregnancy rate are still at ahigh
level, the effects on the results are minimal. The number of litters per sow per year has
decreased (minus 0.02). Gross margin per sow per year is US$9 lower than in the basic
situation.
The model has been used to compare different insemination strategies (when to stop
inseminating if a sow fails to conceive). Besides looking at the herd structure in its
stationary state,herd dynamics canbe studied overtime.The model can be used to study
how aherd approaches anew steady state,for instance,when sometransition probabilities
are modified.
The modelling approach developed for swine was also applied to dairy cattle. Transitions
take place at monthly intervals. Month of calving was included as an additional state
variable, and,therefore, theperiod of all states intheMarkov chain is 12.The dairy herd
modelalsofocuses ontheevaluation ofdifferent calvingpatterns,andonthecomparisonof
different strategies toactually changethecalving pattern of theherd (Jalvingh, 1993).

In animal health economics, Markov chains are especially used to simulate contagious
disease control. The probability of becoming infected isoften assumed to depend on the
fraction of herds or animals being infected during theprevious time period. In that case,
the property of stationary transition probabilities does nothold any more. Such a modified
version of theMarkov chain approach iscalled the StateTransition approach (Dijkhuizen,
1989).
The (modified) Markov chain approach is in fact a stochastic model using probability
distributions, taking into account uncertainty about the future behaviour of the system.
Another approach to simulate disease spread and herd dynamics is stochastic simulation
using random elements (ie,Monte Carlo simulation), as is described in Chapter 9. The
Markovchain approachprovidestheexpected valueoftheresultsby carrying out asingle
run. In the approach using random elements multiple runs are needed to obtain a reliable
estimateoftheaverageresults.Anadvantageofthemultiplerunsistheinformation thatcan
be obtained about the standard deviation of the results,making statistical tests and non-
neutral risk analysispossible.Anadvantage of theapproachusingprobability distributions
instead of random elements is that sensitivity analyses can easily be carried out. The
differences between stochastic simulation usingprobability distributions andusing random
elementsweredescribed extensively inChapter 5.
References
Carpenter,T.E., 1988. Microcomputerprogramsfor Markovandmodified Markov chain disease
models.PreventiveVeterinaryMedicine5:169-179.
Dijkhuizen, A.A, 1989.Epidemiological and economic evaluation of foot-and-mouth disease

controlstrategiesintheNetherlands.NetherlandsJournalofAgricultural Science37: 1-12.
110
Hillier,F.S.&Lieberman,G.J., 1990.Introduction tooperationsresearch.McGraw-Hill,NewYork,

954pp.
Howard, R.A., 1971.Dynamic Probabilistic Systems. Volume I: Markov Models. John Wiley &
Sons,New York, 577pp.
Jalvingh, A.W., 1993. Dynamic livestock modelling for on-farm decision support. PhD-Thesis.
Department of Farm Management and Department of Animal Breeding, Wageningen Agricultural
University,Wageningen, 164pp.
111
Chapter 8
Appendix 8.1
Table A8.1 Basicvalues of biological input variables that determine transition probabilities
concerning reproduction
Variable Basicvalue
Distribution of first observable oestrus

week 1 after weaning 80
week 2after weaning 20
week 3after weaning 0
Oestrus detection rate(%)

before first insemination 98
afterfirstinsemination 90
Farrowing rate (within cycle)(%)

after insemination 1 85
Distribution over 'reasons' for not conceiving

inoestrus after 3weeks 90
inoestrus after 6weeks 0
abortion 7
notpregnant in farrowing house 3
112
Markov chainsimulationtoevaluate user-defined management strategies
TableA8.2Cycle-specific input values concerning transition probabilities and technical and

economic results
Cycle Involuntary Pigs born Piglet mortality Live weight
number disposal(%) alive (%) a sow (kg)
0 10 140
1 2 9.6 13.0 140
2 8 10.3 12.0 160
3 8 10.8 13.0 175
4 7 11.1 13.0 188
5 9 11.2 14.0 196
6 11 11.1 14.0 200
7 13 11.0 14.0 200
8 15 10.9 15.0 200
9 17 10.8 15.0 200
10 18 10.7 15.0 200
Piglet mortality ratebefore weaning;mortality rate after weaning: 1.5%.
TableA8.3Economic input variables andtheir basic values

Variable Basicvalue
Feeder pig price (US$/head) 58

Feed price (USS/100kg)
gilts andnon-lactating sows (EV/kg a: = 0.97) 25
lactating sows (EV/kg =1.03) 25
pigs 42
Slaughter value (US$/kg)
cycle 0 1.40
cycle1 1.28
cycle 2andhigher 1.22
Price replacement gilts (US$/head) 278
1
EV/kg= 1=8786kJnet-energy for fat production.
113
Monte Carlo simulation to model spread in management
outcomes
W.E. Marsh 1 ) & R.S. Morris 2 )

1)Department of Clinical & Population Sciences,College of Veterinary Medicine, University
of Minnesota, St.Paul, MN, USA
2) Department of Veterinary Clinical Sciences, Massey University, Palmerston North, New
Zealand
Objectives
• the differences between information systems andsimulation models
• theprinciples of Monte Carlo simulation
• thepotential use ofageneric livestock generator
Monte Carlo simulation isfurther illustrated with an application in dairy and one in swine
farming.
9.1 Introduction
Amajor goal of livestock farmers istoconsistently maximize the short-term profitability
of the animal enterprise while maintaining the breeding livestock herd as a viable
production unit which will guarantee long-term economic success. This requires that
attention bepaid toresource use,cashflow,debt load and income tax treatment, aswell as
to the population dynamics of the herd.In order tobeconfident of delivering appropriate
and cost-effective care and advice, it is essential that farmers and advisers have a full
understanding of theramifications andpossibleoutcomes of proposed actions.
The sheer enormity of the task of manually computing the outcome of numerous possible
management strategieshasinthepastdiscouraged allbutthemostelementary analyses.The
growing availability of low-cost computing power hasput powerful analytical tools at the
fingertips ofresearchers,farmmanagersandveterinarians.Inthischapter,itisdemonstrated
how a standard personal computer can be programmed to simulate and analyse the
performance of livestock production systems, and hence topredict the likely outcome of
various management strategies asan aidtothedecision-making process,through so-called
MonteCarlo simulation.
9.2 Information systems and computer modelling

Itisuseful todraw some distinctions between information systems and simulation models.
Theprimary purpose of aninformation systemistoprovidethenecessary datatoassist the
115
Chapter 9
decision-making process for the management of an enterprise (in this case livestock
production),notonlyforthecontrolofcurrentoperations,butalsofortheplanningof future
activities. Information systems facilitate the flow and interpretation of data, whereas
simulation models extend the value of the data collected. Models can be linked to
information systems toprovide systematic procedures for the synthesis of management
options based on an analysis of the current situation. In this manner, the information
collection system serves toprovideparameter estimatesfor themodel.These estimates are
updated asnewinformation is acquired.
Modelling allows key features of a system to be defined and represented, so that the
behaviour of the system under various hypothesized conditions can be evaluated. Models
have been developed as a means of exploring the interactions of disease processes,
environment and animal production systems. Systems analysis isemployed toidentify the
important components of each subsystem, and to formulate mathematical relationships
which adequately describe the biological relationships between those components. The
relationships between pairs of variables can be established experimentally; however, the
multiple interactions of the components of each subsystem and the interactions of the
various subsystems comprising thewhole system have been difficult toconceptualize -let
alone investigate.
Theuseof computer simulation techniques provides the added dimension of time. As well
as permitting the study of these complex interrelationships from a static viewpoint, the
behaviour ofthesystemanditssubsystems maybeexplored astheychangedynamically.In
the study of animal health and production such techniques afford improved ways of
interpreting information to improve decision making, as the ramifications of veterinary
intervention or changes in management levels are often not apparent until many months
after theaction hasbeen taken.
Perhaps oneof themain advantages of usingcomputer simulation techniques asan adjunct
to the classical experimental approach is the ability to compress the passage of time.
Computer models enable the experimenter to simulate many years of activity within a
population under different conditions in afew hours.Moreover there can be total control
overexogenousvariables,afeaturewhichcanbeinvaluable -especially ifinterestliesinthe
behaviour of the system under conditions which cannot reliably be reproduced
experimentally.Forinstance,instead ofwaitingmanyyearsfor adrought tooccur,research
may be carried out under simulated drought conditions, and the technology developed to
deal with adverseconditions intimetoavert disaster.
Another application might be to simulate the potential effectiveness of some powerful
drug or vaccine which hasnot yet been evaluated underfieldconditions. If the simulation
exercise were to include an economic analysis of the benefits of employing such a drug,
thebenefits couldbeweighed againstthecostofdevelopment, testingandproduction. Only
if the cost-benefit analysis appeared favourable would the continuation of the project be
recommended. Using a Monte Carlo simulation model, Morris (1976) found that the
development of avaccine for asingle pathogen of bovine mastitis could not be justified
economically as apracticable alternative toteat dipping and dry cow treatment.
116
Monte Carlosimulationto modelspread inmanagement outcomes
Despitetheapparentpowerthatsimulation modellinggivestheexperimenter, itisimportant

to bear in mind that one of the most important requirements of a simulation model is
simplicity intheeyesoftheuser.This isbecause decision makers willnot have confidence
in the predictive ability of amodel if they do not understand its mechanisms. Input and
output variables must, therefore, be expressed interms and units familiar tothose whoare
tousethemodel.
Besides their uses in aiding decision making, models can also have an important role in
teaching and research as means of acquiring a deeper understanding of a system. The
process of model building often serves to expose the gaps in knowledge. One of the
sobering lessons that the research worker almost invariably learns from the modelling
exercise is that certain questions that are crucial tothe comprehensive understanding of
thesystemhaveneverbeenasked,letaloneansweredexperimentally, whileotherquestions
which arenotable only for theirtrivial influence onthebehaviour of the system havebeen
investigated repeatedly.
9.3 Monte Carlo modelling: basic principles

Monte Carlo modelling is socalled because the occurrence and timing of each simulated
event is based on chance as in acasino. Avirtue of this approach is that the structure of
themodel istotally underthecontrol of the research worker andcan evolve in complexity
as the understanding of the modeller grows. The model operates by creating a starting
population within the computer which mimics the population of interest in all relevant
respects.Whathappenstothepopulation overtimeintermsofreproduction,productionand
disease is determined by taking random observations on suitably-defined probability
distributions.
The 'random' numbers used to generate the process are samples on arectangular (or
uniform) distribution R(0,1).They aretermed pseudo-random numbers because they are
produced by the computer as avery long string of numbers which will eventually repeat
itself. The periodicity, or number of numbers before the string begins torepeat itself for
therandomnumber generator, shouldbelargeenoughtoprevent arepetition oftherandom
number sequence during asingle simulation run.The nature of the random number string
isdetermined by a 'seed number' usedtoinitiatetheprocess.Aparticular seedwill always
generate the same string of random numbers, sothe seed number for each simulation run
should becreated in amanner which ensures theindependence of successive runs.
Most computer language run-time libraries contain a procedure or function called
RANDOMIZE, which isarandom number generator initialiser. Each time RANDOMIZE
is invoked, the date and time stored by the computer's operating system is read.
RANDOMIZE interprets the date and time as anumber of seconds since areference date
and time. This large number is manipulated to produce an integer between 1and 65535
which, in turn, is passed to the random number generation function as the seed which
initiates the random number generator for that simulation. Each time therandom number
generator iscalled upon by theprogram, it returns the next random integer in the pseudo-
random sequence. This number will be arandom observation between 0 and 32767 ona
117
Chapter 9
rectangular (uniform) distribution,andcanreadilybeconverted toanobservation onR(0,1).

Various functions have been written and tested to convert the stream of pseudo-random
integers into different probability distributions, which are sampled atvarious times in the
model. The distribution may be discrete, such asthe Poisson or the binomial distribution.
Samplingmayalsobecarriedoutoncontinuous distributions suchasthenormal,lognormal
orexponential distribution (seealsoChapter 18).Methodsusedtogenerate pseudo-random
numbers have been described by a number of authors of texts on simulation methods.
Shannon (1975) and Payne (1982) are useful references which provide source code for
generating random observations on a number of common mathematical distributions.
Anderson (1974)provides auseful discussion ontheuseof seednumbers.
An observation on the uniform distribution can be used to determine whether an animal
becomes pregnant to aparticular mating, given along-term probability of 0.40. Arandom
number between zero and one on arectangular distribution isgenerated by the computer.
If the random number is greater than 0.40, then the animal is considered not to have
conceived. Iftherandomnumberislessthan orequalto0.40,theevent isdeemed tohave
happened and the animal isconsidered tobepregnant. Themodel may goon to determine
whether the animal terminates thepregnancy by aborting orgiving birth to offspring.
Thedistribution selectedforeachtest willdependuponthenatureofeachbiologicalprocess
being simulated. If none of the mathematically-defined distributions is appropriate, then a
purely empirical distribution may be derived from field data. Because they are based on
probabilities rather than fixed calculations,it isnecessary toexecute at multiple runs ofa
Monte Carlomodel toestimate theaverageoutcome and thevariability between runs.
9.4 ORACLE:a generic model of livestock reproduction and production

Livestock production systems provide excellent subjects for computer modelling.
Evaluations of management changes on economic performance and herd demographics
are extremely complex due tothemultiple interactions that exist between various factors.
Prediction ofeffects ofachangeinmanagement strategiesonnetfarmincomemaybequite
misleading iftheyarebasedonsimplisticassumptionsabouttheeffects oftheactionstaken.
Further, one must be careful todistinguish between short- and long-term effects, and to
allow fortimelagsbetween management intervention and improvement in performance.
Aclassic example is that of improving reproductive performance in dairy herds: aone-
year partial budget of the proposed improvement can be produced to show an increase in
annualnetfarm income,mainlyduetoareducedcalvinginterval andareduced replacement
rate.However, thetrue situation may bethat inthefirst yearof improved performance, net
farm income decreases temporarily due to fewer animals being culled because of
reproductive failure. Net farm income will improve during the following year when the
benefits of ashortened calving interval and areduced replacement rate are realized.
Disease control programs, such asthe adoption of teat dipping and dry cow therapy must
often bepractised for at least ayearbefore net farm income can be improved significantly.
With the capability of demonstrating patterns of changing performance through time,
simulation modelling offers ameansofbetterunderstanding thecomplexities and temporal
118
Monte Carlosimulationto modelspread inmanagement outcomes
relationships involved inthe management of livestock herds,andcan provide avehicle for

explaining the likely consequences of veterinary and managemental intervention to the
owners of suchherds.
9.4.1 The generic livestock generator

Just as Blackie and Dent (1974) advocated the use of aspecies-specific skeleton model
thatcould becoupled withdatafrom anindividual farm, itispossible totakethe concept a
step further and design a species-independent skeleton model that can be coupled with
parameters which are species-specific toproduce simulation models capable of predicting
thecharacteristics ofreproductive events inanumber of mammalian species.
Theoutlineofthe 'generic livestock generator'isshowninFigure 9.1.When considering
the sequencing of events in the reproductive and productive cycles of the mammalian
species kept as food animals, it can be seen that certain similarities exist. Before giving
Parturition event
Y
Determination of
number and sex of offspring
1
Y
Commencement of
oestrus behaviour
V
Tobeculled asan yes
Culled
inferior producer?
n
Y °
Success of efforts no
toimpregnate Culled
y yes
no Culled for yes

disease reasons? Culled
^
Figure 9.1Thegeneric livestock generator
119
Chapter 9
birth, afemale animal must first attain puberty, exhibit oestrus behaviour, mate,conceive,
and complete gestation. Given this degreeofcommonality, itisapparent thatifthecoreof
a simulation model were structured around thereproductive cycle ofthe female animal,
the generic livestock generator could be used as a starting point in modelling the
reproductive cyclesofanumber oflivestock species.
At anyconception eventanumberequal toorlessthan some finite numberoffoetuses will
be created. Between conception andparturition, notallofthese potential offspring will
survive: some orallmaybecome resorbed, aborted ormummified. Inthecaseofdeathor
saleofthepregnant female, allthepotential offspring willbelosttotheherd. Consideration
of theseandothercomponents ofreproductive inefficiency, such asbreeding-aged females
failing toconceive orhaving extended intervals between parturition events, shows that
livestock herds tend toproduce far less viable offspring than istheoretically possible.
Further losses areincurred through stillbirths, perinatal andpre-weaning mortality.The
number of females available asreplacements for thebreeding herd is further reduced
according tothesexratio ofthe litter. Young stock mortality andremoval of crossbred,
diseased, slow-developing,andinfertile females leaveareduced numberofsuitable females
from which toselect replacements forthebreeding herd. Within anydefined period,as
long as the number of animals removed does not exceed the number of available
replacement females, breeding herd size will bemaintained. However, themore surplus
replacements available,thegreater theopportunity toreplace genetically inferior animals
with potentially superior replacements,ortoincreasethesizeoftheproduction herd.
Should theremoval (culling plus death) rate exceed thereplacement rate, then notonly
will theherd sizetendtodecline,butalsotheopportunities forgenetic selection inreplace
mentdecisionswillbeforegone.Moreover,inordertomaintainherdsizeataconstantlevel,
the balance ofthe replacement females will have tobepurchased from outside theherd,
often withunknown genetic merit and/or disease status.
The generic livestock generator represents this dynamic process of maintaining a self-
replacing production herd which iscommon todairy,beef, sheepandpigherds onmodern
farms. Theconcept maybeextended toother specieskept ascommercial enterprises such
asrabbits,deerandfur-bearing mammals.Theskeletonmodelpresentsthelogical structure
underlying thereproductive andproductive processes of mammals, andonly becomes
functional when coupled withthespecies-specific parameters.These determine thescale
and variability ofsuch factors asoestrus behaviour, gestation length, litter size, timingof
puberty,productive life spanandmarketable products.
The fundamental concept underlying the structure of the model is that the status of
individual animals withinaherd changes over time according totheprobability ofcertain
events taking place. The model 'moves' individual animals forward through time,
modifying thestatus ofeach according totheoutcome of stochastic decisions basedon
certain rules andprobabilities. While there isonebasic structural framework orskeleton
model,thecriteria fordefining andtheterminology used indescribing status groupsand
events vary accordingtothespeciesbeing modelled.
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Monte Carlo simulation to model spread in management outcomes
9.4.2 Individual animal simulation

Eachproduction cycle for amaturefemale intheherdcommences withaparturition event.
Anumberofoffspring areproduced,thesex,number andsurvival ofwhich aredetermined,
based on long-term probabilities. At some time following the parturition event, oestrus
activity commences, and attempts are usually made to get the mature female animal
pregnantoncemore.Ifsuccessful, thecurrentproduction cycleisfollowed toitsconclusion
which coincides with the occurrence of the next parturition event, which becomes the
starting point for the subsequent production cycle.
The only other events that can terminate aproduction cycle of amature female are death
or culling, signifying the departure of the female animal from the breeding herd. The
occurrence of aculling event may be the outcome of reproductive failure, disease or a
conscious decision by the herd manager to sell a surplus animal where areplacement of
superiorproductionpotentialisavailable.Acullingeventresultingfrom adiseasecondition
canhappen atanytimewithin aproduction cycle,andefforts toimpregnate anon-pregnant
female maycontinue rightuptotheday of culling.
Thefate ofprogenyborntomature females isdetermined inmuchthesamemannerexcept
that some proportion of the female offspring are retained in the herd and reared as
replacements for the breeding herd, while the remainder plus the unneeded males are
eventually sold from the enterprise asmarketable products. Thusthe production cycle of
animmature animal commences withabirthevent andendsinasale,culling orparturition
event.
Life histories of maturemaleanimalsarenot simulated individually because their number
is typically proportionately very small when compared with the females in intensively-
managed breeding herds.Instead, it is assumed that there is always adequate 'male power'
available for purposes of reproductive activity, for which the enterprise is charged a
monetary amount per service. This approach has the advantage that herds using natural
service, artificial insemination, or acombination of both methods may be equally well
represented by themodelling technique.
9.4.3 Whole herd simulation

After having developed themethodology for simulating production cycles for individuals,
theprocess of how thelife histories of many separate animals arecombined torepresent a
model of acommercial breeding herd willbe explained.
As described above, each production cycle for amature female begins with a parturition
event and terminates with death,culling or asubsequent parturition event. The simulation
models presented inthenext sections of thischapter aredriven by an internal clock which
has abase unit of one calendar day. As the clock advances each day,the record of each
animal intheproduction orreplacement herd isinspected for either aparturition orculling
event which haspreviously been predicted tooccur onthat date.Theclock will repeat this
process for each day ofthe simulation period, which istypically setatonecalendar year.
If aculling event isfound, the animal isremoved from the herd, therecord deleted andthe
herd demographics adjusted accordingly. Ifthe animal was sold forfinancialgain, arecord
121
Chapter9
of the saleis made.Attheend ofthe simulation period, asalepriceis randomly generated

and included intheeconomic analysis section oftheprogram.
If aparturition event is found, the simulation of the next production cycle for that animal
is begun. The events which occur in theproduction cycle and their timing are determined
stochastically by taking random observations on mathematically-defined frequency
distributions. The shapesof thesedistributions are determined bythe values of a number
of management level variables which maybeadjusted atthebeginning ofeach time period
being simulated. This sequence ofeventsdetermines the status ofeach animal inthe herd
atanypointintime,andprovidesthebasicdatanecessary for thecalculation ofmeasuresof
reproductive performance for thebreeding herd.
The first determination made after theparturition event isthe number and sex of progeny
born and the extent of perinatal mortality. Next, the first production cycle of surviving
offspring issimulatedtothepointwhereeachindividualanimalrecordcontains apredicted
date for afirst parturition, or else for priorculling ordeath.In the case of immature males
and excess immature females, therewillbe apredicted date of sale ordeath. Having dealt
with the progeny, the model returns tothe mature female and initiates her oestrus cycle,
the timing and natureofwhich is species-specific.
If anoestrusispredicted, thetimesinceparturition andtheprobability ofoestrus behaviour
being detected determines whether aservice event takes place. Then, assuming a service
event hastaken place,the animal mayormay notconceive depending on another random
observationbasedonthelong-termfertility levelssetfortheherd.Ifaconception isdeemed
tohavetakenplace,thenthenextparturitiondateisforecast byaddingthespecies' gestation
length (plus or minus arandom normal deviate) to the date of conception. If an abortion
event is notpredicted for thisfemale thenthe simulation ofreproductive activity ceases.
If an abortion event is predicted, and the time of abortion is within the permitted time
frame for breeding activity, oestrus behaviour maybe re-initiated, and attempts made to
reimpregnate the animal. This is often the case for resorptions and early abortions. An
abortion event late in pregnancy is usually immediately followed by aculling decision,
except where theabortion would occurcloseenough totheforecast parturition date tobe
considered aprematurebirth.Inthelattercase,theeventistreatedasapremature parturition
event,withappropriateeffects onoffspring viability andontheefficiency ofproduction and
reproduction inthe subsequent production cycle.
Given the beginning and ending dates for the production cycle of each animal, and the
pattern of reproductive events occurring during the intervening period, there now exists a
framework upon which the estimation of the input-output relationships of the production
processescanbemade.Inmammalian species,theuseful outputenergyis characteristically
in the form of products of the lactation and growth processes. Consideration of the
efficiency level oftheseproduction processes andtherelative pricelevelsofenergy inputs
and outputsprovides thebasis for economic analyses.
Thus, the aggregation of the reproductive and productive activity of agroup of animals
provides asimulation model of acommercially-managed herd, from which projections of
population dynamics,resourceuse,reproductiveindicesandeconomicanalysescanbedone.
122
Monte Carlosimulationto modelspreadin management outcomes
9.5 DairyORACLE: adairy herd simulation model

The model was developed as atool for studying the effects of management decisions in
dairy herds. As it is constructed around the skeleton model, it is particularly suited for
studying the effects of various management strategies on the reproductive efficiency ofa
herd. Moreover, as the breeding herd must be maintained in a reasonably stable state to
generate aconstant income level, the ultimate effects of reproductive performance on
population dynamicsandfinancial performance arereported.Examplesofusesofthe model
arecomparisonsof servicewindows,heatdetection efficiencies, replacement heifer rearing
strategies and variousprice levels for inputs andoutputs.
In order that the computer can keep track of the population in the simulated herd, it keeps
individual animal records which are similar in nature to those found in a computerized
livestock production recording system.Eachrecord isupdated asevents arepredicted, and
old information is discarded. Using this arrangement, the model isconstantly aware of the
statusofeachanimalintheherd.Thestatusofeachanimalchangeswiththepassageoftime
and in light of the occurrence of simulated events.There are nine mutually exclusive and
exhaustive status categories: maiden heifer; bred heifer; pregnant heifer; lactating cow,
open;lactating cow,pregnant; low-producer, not tobe served; drycow;culled; and died.
9.5.1 Examples of functions used inthe prediction of events

Calf sex and number
Inthebovine,themostcommonlittersizeisone. Recordsofovertwomillionbirthsindairy
andbeef cattlereport the incidence of twins tobe 1.04%or 1:96,of triplets 1:7500andof
quadruplets 1:700 000. Second, the average sex ratio of calves (male:female) was
51.12:48.88. Ignoring thepossibility of triplets (arare event) and quadruplets (a very rare
event),thisinformation is sufficient toconstruct amethod for predicting litter size and sex
ratioby taking asingle random observation on auniform distribution (with H= heifer and
B=bull):
frequency cumulative
Singlebirths: H 0.4888 x0.9896= 0.4837164 0.4837164
B 0.5112x0.9896= 0.5058836 0.9896000
Twinbirths: HH 0.2444 x0.0104= 0.0025418 0.9921418
BB 0.2556 x0.0104= 0.0026582 0.9948000
BH/HB 0.5000 x0.0104= 0.0052000 1.0000000
This method of computation isnot strictly accurate because it assumes that single-sex and
mixed-sex twin births occur in equal proportions. In reality, single-sex twins are more
common because they may either originate from a single embryo which divided
(monozygous) or from two separate embryos which were fertilized independently
(dizygous).Mixed-sextwinscanonlybedizygous.However,astheincidenceoftwinbirths
in cattle is low and with the absence of specific data on the sex ratio in twin births, the
approximation isquiteadequatefor thepurposesofthissimulation model.Onaverage,only
onetwinbirth wouldbe expected tooccureachyearina80-cow herd.
123
Chapter 9
Thus,thegeneration of arandom observation (x)willgivethe following results:

If x> 0.0000000 and x<0.4837164: singleheifer calf
If x>0.4837164 and x< 0.9896000: singlebull calf
If x>0.9896000 and x< 0.9921418: twin heifer calves
If x>0.9921418 and x< 0.9948000: twinbull calves
If x>0.9948000 and x< 1.0000000: mixed twins
Afurther assumption made is that only the single and twin heifer births produce suitable
offspring for rearing as replacements. All bull calves and heifer calves from mixed-sex
births are sold, as there would be a chance that those in the latter group would be
freemartins. Thispolicy iscommonly practised ondairy farms.
Calf record
Ifaheifer calf survivestoweaningatapproximately 6to8weeksofage,themodelproceeds
tosimulate herlifetime events uptothe date offirstcalving, saleordeath.
First theheifer is assigned anidentity.Identities aretypically the nexthighest numberina
consecutive sequence,suchthattheyoungest animalintheherdcarriesthehighest number.
Onceassigned,identitiesareretainedforlife,andareneverre-assignedwithin asimulation
run.These 'cownumbers' areprintedonthelactationsimulation display screentoassurethe
userthatthe model actually simulates the life-time eventsof individual animals.
Aheifer may diebefore reachingmaturity: arandom observation onauniform distribution
istaken.If theobservation is lessthan orequal totheyearly mortality level specified, then
theheifer isjudgedtohavedied.Theactualtimeofdeathisdeterminedbytakingasecond
random observation on a normal distribution with a mean of 360 days and a standard
deviation of 100days.Thusthedeatheventmayoccuratanytimebetween2monthsand22
months of age,normally distributed around 12months ofage.
Next, the date at which the heifer will conceive is determined. The gamma distribution is
usedforthisprediction asitisparticularly suitablefor simulatingtime-delayed eventsona
continuous random variable (Payne, 1982).Asingle parameter, lambda, issupplied to the
distribution representing the average number of days from the minimum breeding age to
conception. Aconvenient method for estimating lambdais:
LAMBDA = (IEI/2.0)+ (IETxSRV)
where
IEI =average inter-oestral interval (days);and
SRV =number of servicesper conception.
Forexample, anIEIof21and aSRVof 1.9would yield:
LAMBDA =(21/2.0) +(21x 1.9) =50.4days.
124
Thefirstpart of theexpression allows for thefact that, on average,there will be adelay of

one-half of aninter-oestral period between aheifer attaining minimum breeding age and
being served for thefirsttime.
Once the conception date hasbeen determined, the projected dateofcalving is determined
bythe equation:
DUEDATE =CONDATE+GESTCOW +RANDNORM(0.0, 3.0)
where
DUEDATE =dateduetocalve;
CONDATE =simulated conception date;
GESTCOW =average gestation lengthfor thespecies;and
RANDNORM(0.0, 3.0)
=arandom observation on anormal distribution with amean of
0.0 and astandard deviation of 3.0days.
Thus, for aGESTCOW value of 283 days,99.9%of the gestation periods will fall in the
range of 274to292days,normally distributed around amean of 283days.
In any group of replacement heifers, there will always be acertain proportion of animals
which fail toconceive, and sold ascull animals.Theuseof the gamma distribution for the
prediction of conception dates inheifers provides aconvenient method of simulating this
situation. A variable, BARREN, indicates the age at which any non-pregnant heifer is
considered to be anon-breeder. If the age of the heifer at the predicted conception date
exceeds the value of BARREN, then the model discards the conception event, and the
animal is sold.
Milk production
The equations used to generate lactation curves are adapted from those developed by
Oltenacu et al. (1981). Daily milk yield of a cow as a function of her days in milk is
predicted by:
Y =GEN(DIM)be c D I M ( D P + 1)
where
Y =dailymilkyield(kg);
GEN =genotypic production potential;
DIM =dayof lactation (daysinmilk);
DP =number of dayspregnant;and
e =thebase of thenatural logarithm.
Separatelactation curvesaregenerated for lactation 1,lactation 2andmaturecows.Thisis

affected by supplying different values for parameters b,c,d,gineachcase.
125
Chapter9
The genotypic production potential for each cow in the starting herd is assigned at the
beginning of each simulation runbytaking the integer valueof arandom observation ona
normal distribution withameanof 100andstandard deviationof 10-RANDNORM(100.0,
10.0),togive arange of 70to 130.Heifer calves 'born' within the model are assigned
their production potential values atbirth.
Thelactationmilkproductionisderivedbyintegratingtheareaunderthecurvebetweenthe
calving date and the drying-off or culling date for each cow.Avariable CRITICAL is the
daily milk yield below which the user does not consider it worthwhile milking a cow.
Should the daily milk production fall below the level of CRITICAL, then the model will
prematurely dryoff acowtobeginanextendeddryperiod.Thissituation istypically found
where alow-yielding cowhas anextended lactation following adelayed conception.
In the case of cows that donot become pregnant and are not culled for disease reasons
during alactation,amodified algorithmisused.Thecullingdateisdeterminedbytheshape
of the lactation curve, with thecow being retained in the herd and milked until her daily
milk production falls below CRITICAL.This isthemechanism by which cows that fail to
conceive 'fall out' of themodel.
While the current version of the model uses the above formula for generating lactation
curves,itisimportant toremindthereaderthat itwasdeveloped from DairyHerd Improve
mentAssociationrecordsforherdsinNewYorkState(Oltenacucf ai, 1981),anditmaynot
be appropriate for applications ofthe model inotherparts of the world. Characteristically,
feeding programs in dairy production systems in the northern United States involve
moderatetoheavylevelsofgraincombinedwithforageprovided asconservedcorn (maize)
silage and alfalfa hay or silage.The result is a high-protein, high-energy diet with little
seasonal variation.
Inparts oftheworld wheredairy herdsaregrazed for theirforage supply andproduction is
geared toseasonal patterns of forage growth and quality,it may bemore applicable touse
other lactation curve equations, such asthose by workers of theMilk Marketing Board in
England and Wales.Themodel:y=An b e"cn, developed byWood (1967) wasthe first to
attempt todescribe anentirelactation.Theequation expresses average daily milk yield (y)
inthen m weekoflactation, whereA,b,carepositiveparameters that determine the shape
of the curve.Wood applied this model in anumber oflater studies of lactation curves in
British Friesian cattletaking into account season of calving and the 'spring hump' where
milk production is stimulatedbythechangeindietofconserved forage tofresh grass.
Cobby and Le Du (1978) expanded the model of Wood (1967), and more recently, Van
Arendonk (1985)extended the modelof Cobby andLeDu toinclude the effect of season
of milkproduction anddaysopen:
Y
tj, i,DO =( a -b t l - 13e'ctl)(l +(tp/140 )2)-lfmgi
where
Yt] j po =tne m
^ ^ production (kg) at tj days after calving for the i th
month ofcalving andDOdays open;
126
Monte CarloSimulationto modelspreadinmanagement outcomes
a =level parameter (kg);

b =the slope during the decline in production after the peak
production (kgperday);
c =parameter describing theinitial increase in production;
L =tj -DO - 122when tj >DO + 122 and t p = 0when tj <DO+
122;
fm =effect of the m1*1 calendar month of the year on monthly
production; and
gj =effect of thei1"month after calving onthe levelof production.
It is thought appropriate that a suite of lactation curve algorithms be provided for

applications ofthemodeloutsideoftheUnitedStates,particularly for developing countries
and areaswherethesystemof milkproduction islow-input /low-output innature.
9.5.2 Modeloutput
Asindividual animal recordsareused inthesimulation procedures,there areatremendous
number of dataproduced inthecourseofonesimulated year.Inorderthatthe performance
of the herdbe evaluated andcompared among different simulated scenarios,the data must
bedistilled downtoacomparatively few,butmeaningful, reports.Onceagain the modeller
isfaced with adilemma of deciding what toreport, and inwhat form topresent it.Report
categories are:population demographics; performance indices;reproductive performance;
monthly graphics; livestock valuation; cash flow analysis; and income statement. Twoof
these willnow further be illustrated.
Table 9.7 DairyORACLEreproductive performance indices report

Reproductive performance indices
year 1 year 2 year 3 year 4 year 5 year 6
Calving to first service
Median interval (d) 83 85 84 81 85 83
Mean interval (d) 90.2 85.4 84.9 83.8 90.9 82.6
% cows re-served 81.0 86.2 87.9 83.0 92.5 84.9
Calving to conception
Median interval(d) 143 135 114 129 114 182
Mean interval (d) 103.3 113.5 100.7 99.0 108.4 110.3
% cows re-conceiving 60.3 67.7 65.5 69.8 79.2 60.4
Summary measures
Heat detection eff. (%) 38.7 42.9 40.0 45.2 44.3 35.9
1st service preg. rate (%) 42.6 41.1 47.1 52.3 55.1 44.4
Services per conception 1.5 1.8 1.5 1.5 1.6 1.5
Service: conception ratio 2.2 2.4 2.1 2.1 2.0 2.4
Annual replacement rate (%) 33.3 25.6 29.5 35.2 30.1 33.5
Calf mortality (%) 2.2 8.1 7.7 0 4.2 4.5
127
Chapter 9
Performance indices
Theperformance indicesfilltwovideodisplayscreensoronesheetofpaper.Thefirstscreen
is mainly concerned with reproductive performance, while the second contains a mixture
of physical and financial measures. This report accumulates figures for six years of
simulated data,making itconvenient tocompareresultsbetweenyearsandtofollow trends.
The cohort used for the reproductive indices is the group of cows calving in the year
simulated, and thus is directly comparable with the DairyCHAMP annual report. The
physical andfinancialmeasures relate toevents occurring within the simulated period.
Note that although model inputs such as heat detection efficiency and first service
pregnancy rateswereheldconstantthroughoutthe6-year period simulated inthisexample,
the values shown intheannual summary values appear tofluctuate from yeartoyear. This
phenomenon istobe expected, asthe simulation model isproperly mimicking the natural
biological variation that occurs in such animalpopulations.
Financial statements
The DairyORACLE model provides both cash flow and income statements for the dairy
enterprise.Theincomestatementretains datafor allsixsimulatedyears,andenables trends
tobeseen ataglance.Thefour mainfinancial categoriesfeatured inthisreport aretotalcash
inflow, variable expenses,fixedexpenses andincometax treatment.
Totalcashinflows includethefourcategoriesofoff-farm sales,whichare:milk;calves;cull
cows, and surplus springing heifers.
Variable expenses include allexpenses which vary with thenumber of cows inthe herd or
thelevelofproduction:forage expense,dairy grain,heifer grain,calf milkreplacer, labour
expense, springing heifer purchases, breeding fees, veterinary and medical expenses,
utilities and fuel, andchemicals and supplies.
Fixed expenses are those expenses which do not vary directly with amarginal change in
the number of cowsintheherd orthelevelof production.However, it shouldbenoted that
anappreciablechangeinthemagnitude oftheenterpriseorproduction levelwill necessitate
anadjustment ofitemsinthiscategory:interestonlong-termdebt,insurancepremiums,and
repairs and maintenance tobuildings and equipment.
The cash flow statement iscomputed for twelve monthly periods for each simulated year.
Due to the size limitations of the video display terminal, results are summarized for four
quarterly periods.Afifthcolumn displays annualtotals.
Thebottompartofthestatementisthecashflow resolution calculations.Themodel willnot
permit the cash balance to fall below zero,but will automatically borrow from a line of
creditsufficient funds topreserveapositiveorzerobalance.Interest onthisloanisassessed
on amonthly basis.When apositive cash flow permits the repayment of operating loans,
interest is always paid before principal. All such interest payments are deducted from the
taxable incomeintheincome statement.
128
Table 9.2 DairyORACLEfinancial statement report
YEAR 1 YEAR2 YEAR3 YEAR4 YEAR5
Milk sales income 126,496 130,651 142,774 128,753 136,199

Calf sales income 4,630 4,183 4,697 4,320 5,067
Cull sales income 9,817 6,657 8,234 13,647 13,791
Springing heifer sales 0 0 0 0 0
TOTAL CASH INCOME 140,943 141,491 155,705 146,720 155,057
Forage expense 30,165 31,966 34,882 31,097 33,629

Dairy concentrates 21,054 21,572 23,584 21,345 22,423
Heifer concentrates 10,325 10,022 11,425 13,432 14,091
Calf milk replacer 687 701 652 734 800
Labour expense 10,313 10,928 11,926 10,632 11,497
Springing heifers bought 0 0 0 0 0
Breeding fees 1,310 1,610 1,370 1,340 1,300
Veterinary &medical 3,826 3,335 4,445 3,626 4,123
Utilities&fuel 11,998 11,975 11,989 13,125 12,463
Chemicals&supplies 4,004 3,992 4,375 4,154 4,416
TOTAL VARIABLE EXPENSES 93,682 96,101 104,648 99,485 104,742
ENTERPRISE GROSS MARGIN 47,261 45,390 51,057 47,235 50,315
Payments onlong-term debt 9,300 9,300 9,300 9,300 9,300

Insurance premiums 1,500 1,500 1,500 1,500 1,500
Repairs&maintenance 2,500 2,500 2,500 2,500 2,500
TOTAL FIXED EXPENSES 13,300 13,300 13,300 13,300 13,300
TOTAL CASH INFLOWS 140,943 141,491 155,705 146,720 155,057

TOTAL CASH OUTFLOWS 106,982 109,401 117,948 112,785 118,042
NET CASH FLOW BEFORETAX 33,961 32,090 37,757 33,935 37,015

Change inherd valuation 12,525 12,525 12,525 12,525 12,525
NET INCOME BEFORETAX 46,486 44,615 50.2B2 46,460 49,540

Interest onoperating loan 0 0 0 0 0
TAXABLE INCOME 46,486 44,615 50,282 46,460 49,540

Incometaxdue 20,268 19,314 28,099 20,255 21,826
AFTER TAXNETINCOME 26,218 25,301 22,183 26,205 27,714

AFTER TAXNETCASK INCOME 13,693 12,776 9,658 13,680 15,189
9.6 PigORACLE:a pig herd simulation model

The nine mutually exclusive and exhaustive status categories for animals simulated within
PigORACLE are:gilt, selected for andentered breeding herd; gilt, served; gilt, diagnosed
pregnant; sow, lactating; sow, weaned; sow,served; sow, served before weaning; sow,
diagnosed pregnant; and sow, diagnosed not pregnant. The nomenclature of the status
groupsreflects thefundamental processesinthereproductivebiologyof the porcinespecies.
9.6.1 Examples of functions used inthe prediction of events

Litter size and number
Mean total litter size in sows increases topeak around the fourth, fifth, sixth and seventh
parities, and declines thereafter. The decline inolder sowsis attributable to an increase in
embryonic death rate. Because of this relationship between parity and litter size, the
129
Chapter 9
PigORACLE input screen dealing withbreeding herd management allows the user toedit
thevaluesforexpected averagelittersizesbyage:from first paritygiltsuptoseventhparity
and older sows. As the distribution of litter sizes is approximately normal, a random
observation on anormal distribution ismade togenerate an integer which represents the
total number of pigs born in an individual litter. Experimentation with the random
generation process has shown that for mean litter sizes between 7 and 15, a standard
deviation equal to one-fourth of the mean gives a satisfactorily realistic spread of total
littersizes.
Use of the random number generation process involves avery small chance that a litter
size greater than that which has been observed in nature being generated. Therefore, a
constant,(MAXLITTER) isusedtotruncatethedistribution,suchthatifalitter sizegreater
thanMAXLITTER ispredicted, themodel will 'throw away' the observation and generate
a new one.MAXLITTER iscurrently set at 25,but can be changed if larger total litter
sizes areobserved inswineherds.
Culling and removal

AnalysisofthePigCHAMPcullingdatahasshownapeakinthefrequency ofcullingevents
at around 5 weeks post-farrowing, which coincides with the completion of the lactation
period. Inordertogenerate probability distributions for thetiming of removal, the reasons
for removal have been broken down into four categories which correspond tothe coding
systemusedbyPigCHAMP:
1
lameness,injuries, anddegenerativeproblems;
specific systemicdiseases;
1
miscellaneous problems;
1
reproductiveproblems:farrowing andlitter-related; and
•reproductive problems: fertility-related.
Sows with fertility-related problems 'fall out' of the model as aconsequence of failing to
conceiveortocompleteagestation successfully, andtherefore donotrequireany additional
mechanism for timingtheirremoval.Thetime of removal for each culled sow is predicted
by taking arandom observation onaPoisson distribution. However, inthiscase the value
returned isthenumberofweekspostpartum ratherthanmonths.Arandomobservation ona
uniform distribution returns an integer between 1and 7which represents the day of the
week when theculling ispredicted totakeplace.
Weaning to first oestrus intervals

The process involved intheprediction ofoestrusevents isbased onthelognormal distribu
tion.The first oestrusin sowsnormally occurs shortly after the completion of the lactation
period,theaverageweaningtooestrusintervalbeing4-5days.Default valuesofameanof
7 dayswith astandard deviation of 1 daygives adistribution with 90%of sows in heatby
8dayspost-weaning.Themeasuredmeanandstandarddeviationofthisdistributionsare5.7
and 1.36 respectively. Amean of 21days and astandard deviation of 1.5 days are used as
130
Monte Carlosimulationto modelspreadinmanagement outcomes
default values for the inter-oestral interval.
9.6.2 M o d e l output
Although PigORACLE hasmanybuilt-in reports (similartoDairyORACLE),both models
cangeneratebatch inputfilesfor PigCHAMP and DairyCHAMPrespectively. Oncemodel
outputhasbeen saved asaPigCHAMPdatafile,allPigCHAMPreportsandoptionsmaybe
used to analyse and present simulated data. Biological performance of astart-up herd is
shown by the Performance Monitor Report (Table 9.3). Changing patterns in breeding,
farrowing and weaning performance canbe observed as the herd develops from aflow of
purchased gilts to a mature parity distribution over the 5-year simulation period.
Table 9.3Simulated data from PigORACLE in PigCHAMP Performance Monitor Report
PERFORMANCE MONITOR PigCHAMP 3.05

1 JAN 88 -31 DEC93 (C)1985,87,88,91 Univ of Minn
FARM: WEANUEDS Licensed toWilliam E.Marsh
Printed:31 DEC 93
JAN 88 JAN 89 JAN 90 JAN91 JAN 92 JAN 93 JAN 88

DEC 88 DEC89 DEC 90 DEC91 DEC 92 DEC 93DEC 93
BREEDING PERFORMANCE
Total number of services 645 599 632 620 612 669 3777
Percentage repeat services 11.3 10.5 9.8 9.5 9.3 12.1 10.5
Weaning -1st service interval 5.4 6.1 5.7 5.5 5.1 5.4 5.5
Percentage sowsbred by7days 87.9 83.2 85.7 86.2 90.9 87.3 86.8
Entry -1st service interval 5.6 4.9 6.0 5.8 5.3 6.0 5.6
FARROWING PERFORMANCE
Number of sows farrowed 376 516 532 532 526 554 3036
Ave parity of sows farrowed 1.4 2.9 4.1 4.8 5.6 6.0 4.3
Average total pigsper litter 10.3 11.1 11.2 11.2 11.2 11.3 11.1
Average pigsbornalive/litter 9.3 10.1 10.1 10.0 10.0 10.0 10.0
Percentage stillborn pigs 9.5 9.2 9.9 10.7 10.3 10.9 10.1
Farrowing rate 84.7 84.2 86.1 85.1 84.8 86.3 85.2
Adj. farrowing rate 87.9 B8.4 89.7 89.0 88.7 89.2 88.8
Farrowing interval 143 145 144 144 144 144 144
Litters /mated female/year 2.57 2.43 2.48 2.46 2.48 2.46 2.48
Litters /crate /year 9.4 12.9 13.3 13.3 13.1 13.9 12.6
WEANING PERFORMANCE
Number of littersweaned 345 516 535 531 530 542 2999
Total pigs weaned 2766 4454 4644 4611 4611 4616 25702
Pigs weaned per sow 8.0 8.6 8.7 8.7 8.7 8.5 8.6
Preweaning mortality 14.1 14.3 13.6 13.7 13.4 14.8 14.0
Average ageat weaning 21.9 21.7 21.7 21.7 21.6 21.5 21.7
Pigs wnd/mated female/yr 20.6 21.0 21.5 21.4 21.5 21.0 21.2
Pigs weaned/crate/year 69.0 111.3 116.1 115.3 115.0 115.4 107.0
Pigs weaned/1ifetime female 6 20 32 39 49 47 33
POPULATION
Ending female inventory 222 215 213 208 226 244 244
Average parity 1.5 2.7 3.7 4.5 4.9 5.1 5.1
Average female inventory 184.1 211.3 217.4 218.2 216.6 223.9 211.9
AFI /Crate 4.6 5.3 5.4 5.5 5.4 5.6 5.3
Average gilt pool inventory 4.1 1.2 1.4 1.2 1.2 1.6 1.8
Gilts entered 269 87 84 76 85 95 696
Sows and giltsculled 43 90 82 74 59 70 418
Sow and giIt deaths 2 2 1 5 3 2 15
Replacement rate 145.7 41.2 38.6 34.8 39.1 42.4 54.7
Culling rate 23.3 42.6 37.7 33.9 27.2 31.3 32.8
Death rate 1.1 0.9 0.5 2.3 1.4 0.9 1.2
Avenon-productivesowdays 33.2 33.7 28.6 30.8 29.4 31.0 31.0
Ave NPD /parity record 9.5 11.8 10.1 11.1 10.4 10.7 10.6
131
Chapter 9
Although all input valueswereheldconstant for theduration of thisrun,thevalues of such

measures as percentage of repeat services, farrowing rate, and preweaning mortality
fluctuate from yeartoyear.This isanartifact ofthestochastic simulation process.Asthese
measures naturally fluctuate, reflecting variability intheunderlying biological processes,
stochastic simulation models can be helpful in setting production targets and interference
levels. Multiple simulation runs can provide the data from which tocalculate long-run
averages, and provide astatistical basis for identifying significant deviations, quantified in
standard deviations from themean.
Monte Carlo simulation models are most useful when the aggregate results of multiple
runs arepooled toprovide estimates ofexpected values and associated variability. In fact,
potential users should be warned of the dangers of interpreting the results of asingle run
of the model, as it may,by chance, reflect aparticularly favourable orunfavourable setof
outcomes,whichmay beunlikely tobeencountered intherealworld.Werecommend that
the results of a set of a minimum of ten replications of PigORACLE simulations be
interpreted as aset, asthemodel runs veryquickly on state-of-the-art personal computers.

The concept of developing ageneric model of reproduction and production in breeding
livestock herds using Monte Carlo simulation techniques has been illustrated tothe point
thatfunctional modelsofdairyandswineenterprises havebeenconstructed from acommon
skeletonmodel ofreproductivebehaviour.Themodelsprovidesatisfactory approximations
tothebiology of reproduction indairy and swine herds,and providethemeansto quantify
performance in economic terms (eg, Marsh, 1986; Marsh et al., 1987). Experience in
building, testing and applying these models has shown that, due to the many complex
relationshipsthatexistwithinbreedinglivestockherds,quitesubtlechangesinmanagement
policy can have far-reaching effects onthedemographics, productivity andprofitability of
theenterprise.Comparisonofreplicaterunsoftheprogram(usingdifferent randomnumber
seeds) serves to illustrate how the inherent natural variability of livestock production
systems can often lead to surprising results,even when management policies are followed
faithfully.
References
Anderson,J.R., 1974.Simulation:methodologyandapplication inagriculturaleconomics.Review
ofMarketingandAgriculturalEconomics43:3-55.
Blackie,M.J.& Dent,J.B.,1974. Theconceptandapplicationofskeletonmodelsinfarmbusiness

analysisandplanning.JournalofAgriculturalEconomics25:165-173.
Cobby,J.M.&LeDu,Y.L.,1978.Onfittingcurvestolactationdata.JournalofAnimalProduction
26:127-133.
132
Monte Carlosimulationto modelspreadinmanagement outcomes
Marsh, W.E., 1986. Economic decision making on health and management in livestock herds:
examining complex problems through computer simulation. PhD-thesis, University of Minnesota,
St. Paul, 304pp.
Marsh, W.E., Dijkhuizen, A.A. &Morris,R.S., 1987.An economic comparison of four culling
decision rules for reproductive failure in U.S.dairy herds, using DairyORACLE. Journal of Dairy
Science 70: 1274-1280.
Morris, R.S., 1976. The use of computer modelling in epidemiological and economic studies of
animal disease.PhD-thesis, University of Reading,479pp.
Oltenacu, P.A., Rounsaville, T.R., Milligan, R.A. & Foote, R.H., 1981.Systems analysis for
designing reproductive management programs to increase production and profit in dairy herds.
Journal of Dairy Science 64:2096-2104.
Payne, J.A., 1982.Introduction to simulation: programming techniques and methods of analysis.

McGraw-Hill, 324pp.
Shannon, R.E., 1975. Systems simulation: the art and science. Prentice-Hall, Inc. Englewood
Cliffs, NJ, 387pp.
Van Arendonk, J.A.M., 1985.Amodel to estimate the performance, revenues, and costs of dairy
cowsunder different production and price situations.Agricultural Systems 16: 157-189.
Wood, P.D., 1967.An algebraic model ofthe lactation curve in cattle.Nature 216: 164-165.
133
10
Scope and concepts of risky decision making
A.A. Dijkhuizen 1 ), R.B.M. Huirne 1 ) &J.B. Hardaker 2 )

Netherlands
2) Department of Agricultural and ResourceEconomics, University of New England, Armidale,
Australia
Objectives
Fromthis chapter thereader should gainknowledge of:
• thebasic steps inthedecision-making process
• theconceptsofdecisiontheory,takingintoaccounttheriskattitudeofthedecision maker(s)
• the various choice criteria, such as expected utility model, stochastic efficiency criteria
and expected monetary value
• Bayes' theorem andtheeconomic value of information
10.1 Introduction
The economic success of animal health management isclosely related tothe way inwhich
decisionsaretakenandimplemented.Thedecision-makingprocessisessentially a five-step
procedure:
1.defining theproblem or opportunity;
2. identifying alternative courses of action;
3. gathering information and analyseeach of thealternative actions;
4. making thedecision andtake action;and
5.evaluating theoutcome.
The first step is probably the most important one. When problems are not recognized,
continuing losses may occur, particularly with subclinical diseases and reduced fertility.
Monitoring systemsespeciallywithinherdhealthprogramsareincreasingly usedtoregister,
and to help identify, these problems. Once aproblem has been defined, it will seldom be
the case that there are no reasonable solutions or actions to be taken (step 2). It will be
more common that the number of alternatives has to be limited, so that each can be
examined thoroughly. For documenting and examining thepotential effects of the various
alternative actions (step 3),it will notbe feasible to have only actual field data available.
Computer simulation has long been recognized as a complementary approach and is
particularly attractive when real-life experimentation would be impossible, costly or
disruptive.
135
Chapter 10
Whichever way,andtowhatever extent,theinformation hasbeen provided, thefourth step

isalways taken,either consciously (bychoosing the 'best' option) ornot (which implicitly
means acontinuation of the available strategy). Evaluating the outcome of actions taken
(step 5)brings the decision makerback tothefirst step,thus making theprocess acyclical
one.
Decision making in animal healthmanagement hastodeal with several factors over which
the decision maker has little or no control, making the outcome of actions uncertain.
Different criteria can be applied towhat iscalled 'decision making under risk'. Some of
those criteria arediscussed below andillustrated with anexample.
10.2 Components of a risky decision problem

Traditional analyses of decision making have distinguished two types of imperfect
knowledge: risk, when the probabilities of the uncertain outcomes are known, and
uncertainty, when they are not.However, this distinction is of little practical use and is
discarded by most analysts today. Probabilities can be 'known' only for the so-called
stationary stochasticprocesses,ie,foreventswherethereisvariabilitybutwherethesources
and nature of the variability remain constant through time. Such processes are rare in
practicaldecisionmaking.Inmoderndiscussionsandanalyses,therefore,thetermsriskand
uncertainty areused moreorless interchangeably.
Any riskydecision involves five components:acts,states,probabilities,consequences and
achoice criterion (Anderson etal.,1977).Acts(aj) aretherelevant actions available tothe
decision maker.They constitute therelevant set of mutually exclusive alternatives among
whichachoicehastobemade.Examplesofactsinanimalhealthmanagement are 'treat' or
'do not treat' an animal, or 'keep' or 'replace' aspecific animal.The possible events or
states of nature (9j) must also be defined by amutually exclusive and exhaustive listing.
Examples of states of nature are 'good', 'average' or 'poor' rainfall, or 'severe', 'normal',
'small' or 'no' outbreaksofacertaindisease.Theessenceofariskydecisionproblem isthat
the decision makerdoesnotknowfor certain which statewillprevail. Some state variables
are intrinsically continuous (eg,herd health status),but generally adiscrete representation
(such as good, average orbad) will prove adequate. Prior probabilities (Pj) reflect the
degrees ofbelief held bythedecision maker aboutthechance of occurrence of each of the
possible states.Suchprobabilities areconsidered subjective orpersonal innature.Example
probabilities for adisease problem canbe as follows: aprobability of 0.2 for a 'severe'
outbreak, 0.3 for a 'normal', 0.25 for a 'small' and 0.25 for 'no' outbreak of a certain
disease.Depending onwhich of theuncertain statesoccurs,choiceof anactleadsto some
particular consequence,outcomeorpayoff. Finally,somecriterionofchoice is necessary
to compare the possible consequences of any act with those of any other act. One such
criterion isthe expected monetary value (EMV),defined as the summation of the possible
money outcomes multiplied bytheirprobabilities.
Consider a simplified case in which afarmer can choose between two acts, ie,herd health
programs aj and &2- The payoffs of theprograms areexpected todiffer according to the
actualhealthstatusoftheherd.These 'statesofnature' canbegood,averageorbad,withan
136
Scopeandconcepts of riskydecision making
estimated (subjective) probability of 0.2,0.6, and0.2 respectively. Results are summarized

inTable10.1.
Table 10.7Payoff matrix for two herd health programs (US$)

Statesof nature(6j) P(9j) Program a-] Programa2
Herd health good (8j) 02 ÏÔ5Ô -10000
Herd health ave. (62) 0.6 4000 5000
Herd healthbad (63) 0.2 9000 19000
Expected monetary value 4400 4800
When taking into account themean outcome (ie,expected monetary value) tocompare the
alternatives, program a 2 isthe preferred one.This choice, however, does not hold for the
situation shouldtheherdhealthstatusbegood,thusmakingthisaclassicalexampleofrisky
choice.
10.3 Subjective expected utility model

One of the most widely applied models for studying decision making under risk is the
subjective expected utility (SEU)model (Anderson etai, 1977).Using the model, actions
are ordered according tothebeliefs andrisk attitudes ofthedecision maker.Each outcome
is assigned autility value (ie,preference), according toapersonalized, arbitrarily scaled
utility function. Theutility values for each possible outcome of an action are weighed by
their(subjective) probability andsummedacrossoutcomes.Theresultingexpectedutilityis
apreference index for that action.Actions areranked according totheir levels of expected
utility with the highest value being preferred. Farmers' attitudes towards risk vary
depending on their objectives and financial resources, for instance. Most farmers, like
otherpeople,tend toberiskaverse.
Suppose that afarmer's utility function for gains and lossesisadequately represented by:
U(x) =x -0.005X2 forx<50
wherex denotes thousands ofUSdollars.
This function makes itpossible toconvert the money values for each of the alternatives in
Table 10.1toutility values(U):
U(aj) =0.2£/(US$1000)+0.6£/(US$4000)+0.2£/(US$9000)
=0.2(0.995) +0.6(3.920) +0.2(8.595) =4.270
U(a2) = 0.2i/(US$-10000)+0.6t/(US$5000)+0.2t/(US$19000)
=0.2(-10.5) +0.6(4.875) +0.2(17.195) =4.264
137
Chapter 10
So,takingintoaccounttherisk-averse attitudeofthefarmer makesprogramaj the preferred

one, ie,yielding thehighest subjective expected utility.
The implementation of the SEU model requires the risk preferences of decision makers
(ie, the utility function) to be known. The notion of certainty equivalent is central to the
measurement ofthesepreferences, andhencetotheelicitation oftheutility function. When
given achoice between (a) payment of US$1000 for sure versus (b) achance of winning
US$5000 with aprobability of 0.25,for instance,mostpeoplewill optfor (a),even though
(b) has a higher expected monetary value. The certainty equivalent (CE) of a risky
prospect then isthe value which the decision maker isjust willing to accept in lieu of the
riskyprospect.So,therelationshipbetweentheCEandtheexpected monetary value(EMV)
of the outcomes tells something about the decision maker's attitude towards risk. If the
person isaverse torisk, which isnormally the case, (s)he will assign aCEless than EMV.
Forpeople thathave apreference for risk CEwillbe greater thanEMV,while in the case
of risk indifference CE=EMV.
Methods of eliciting utility functions involve asking people to specify their CEs for
specified risky prospects. According toAnderson etal.(1977),the simplest recommended
method isbased on considering anEqually Likely risky prospect and finding its Certainty
Equivalent. In using this so-called ELCE-method, the first step is to find the CE for a
hypothetical 50/50 lottery with the best and worst possible outcomes of the decision
problem asthetworisky consequences.The next stepistofindthe CEfor each of the two
50/50lotteriesinvolvingthefirst-establishedCEandthebest andworstpossible outcomes.
Thisprocessofestablishing utilitypointsiscontinued untilsufficient CEsareelicitedtoplot
the utility function. In order toobtain meaningful values it isimportant toprovide enough
realism for this type of game setting (Smidts, 1990). Moreover, worthwhile outcomes
require utility functions tobe described in amathematically sound way, thus making the
choice of thefunction form very important.
10.4 Other choice criteria

Utility functions maynot alwaysbeeasy toelicit. Many authors,therefore, have suggested
alternative rules that might be used, leaving it tothe individual decision maker to decide
what criterion isthemost appropriate given his/herown specific situation (Barry, 1984).
Afirstgroup ofcriteria includes those that donotrequireprobability estimates:
• Maximinisacriterion thatarisesfrom averypessimistic orconservativeriskattitude.Each
action isjudged solely on its worst outcome, and the one that maximizes the minimum
gain is selected. Inthe example of Table 10.1the minimum gains of thetwoprograms are
US$1000 and -10000respectively, with program aj being thepreferred one according to
this criterion.
• Minimax regret is similar to theprevious criterion but it argues that the 'correctness' ofa
decision be measured by the amount by which the outcome could have been increased,
had the decision maker known some information beforehand, and then selects the action
with the smallest maximum increase (ie, regret). This is acriterion which has in mind
judgment by hindsight. When choosing program &2 m Table 10.1 the maximum possible
138
Scope and concepts of risky decision making
regret isUS$11000 (ie,US$1000 -(-10 000), in case herd health turned out to be good),
while with program al, this isUS$10000 (ie,US$19000 -9000, if herd health wasbad).
So,program al isnowthepreferred one.
• Maximax simply amounts to scanning the outcome matrix to find its largest value and
then taking thecorresponding action. This is atotally optimistic criterion, and similar to
the approach of agambler. In Table 10.1 this would result in program a 2 being taken (ie,
US$19 000being thelargest payoff).
Asecond group of criteria includes morethan one single value of theoutcome distribution
and,therefore, dorequire probability estimates:
• Hurwicz a index rule allows for a weighed average of the minimum and maximum
outcome per action, and then selects the action with the highest weighed average. In
formula:
Max[Ij =a(Mj) + (l-a)(mj)]
where a issupplied bythedecision maker subject to0<a<l, M;equalsthe maximumgain

ofaction j , andm:equalstheminimumgainofaction j . Shoulda =0.5,thentheoutcomein
Table 10.1is0.5 x9000+ (1-0.5) x 1000=US$5000 for program aj and 0.5 x 19000+
(1-0.5) x-10000=US$4500 for program a2.Program aj then is preferred.
• Laplace principle of insufficient reason selects the action with the highest expected
outcome, based on equal probabilities for all outcomes. Unlike the previous criteria it
takes into account the outcomes for all events, but still ignores that one event may be
(considered) more likely than the other. For the example in Table 10.1 this turns out to
provide an equal outcome for the twoprograms, ie, (1000 +4000 +9000)/3 = US$4667
for program aj and (-10 000+5000+ 19000)/3=US$4667 for program a2.
• Expected Monetary Value is probably the best-known criterion, and is defined as the
summation ofthepossiblelevelsofoutcomemultiplied bytheirprobabilities.Iftherearem
possible states for the j t h action with the i t h state denoted 9j, having outcome Oj: and
probability Pj, then theexpected monetary value of the outcome isgiven by:
EMV(Oj) = PJOJJ +P 2 0 2 j +...+P m O m j = iPjOy
It assumes that the decision maker's satisfaction ismeasured by the level of profit, which
in fact is aspecial linearcase of themoregeneral expected utility model (ie,assuming risk
neutrality of the decision maker). The outcome for the two programs inthe example was
already given inTable 10.1, with program a-> being thepreferred oneinthiscase.
None of the previous criteria, however, takes account of any 'utility-based' trade-off
between the average outcome of each strategy and its variance. That is why stochastic
efficiency criteria (thethird group tobeconsidered) are proposed as auseful alternative,
atleastforcaseswhereprobabilities arereasonably welldefined. Stochastic efficiency rules
139
Chapter 10
satisfy the axioms of theexpected utility modelbut donotrequireprecise measurement of

risk preferences. However, as opposed to the complete ordering achieved when risk
preferences are known, they provide only a partial ordering (King & Robison, 1984).
Stochastic efficiency rules are implemented by pairwise comparisons of cumulative
distribution functions of outcomes (y)resulting from different actions.
First-degree stochastic dominance (FSD)holds for all decision makers whoprefer more
to less (ie,whose first derivative of theutility function ispositive). No assumptions are
made about risk preferences of the decision maker, which widens the possibilities of
application butlimits itsdiscriminatory power.Graphically, theseconditions mean that the
cumulative ofthedominant (ie,preferred) distribution mustneverlieabovethecumulative
ofthedominated distribution.InFigure 10.1,for example,F(y)dominatesG(y)byFSD,but
neither F(y) norG(y)canbeordered byH(y).
1.0
Xl
o
3
E
3
O
Figure 10.1First-and second-degree stochastic dominance
Second-degree stochastic dominance (SSD)assumes that decision makers,inaddition to

preferring moretoless,areriskaverse,withutilityfunctions havingpositive, nonincreasing
slopesatalloutcomelevels.UnderSSD,analternativewiththecumulativedistribution F(y)
ispreferred toasecond alternative with cumulative distribution function G(y)if
JF(y)dy<jG(y)dy
for allpossible values ofy,andiftheinequality isstrictfor somevalueofy.SSDhas more

discriminatory power than FSD, but still may not effectively reduce the number of
140
Scopeandconceptsof riskydecision making
alternatives.Graphically,becausetheaccumulated areaunderF(y)inFigure 10.1isalways

less than or equal to that under either G(y) or H(y), only F(y) is in the so-called SSD-
efficient setofthesethreealternatives.WhenonlyG(y)andH(y)areconsidered, neitherone
dominates the other by SSD, since the accumulated area under G(y) is less than the area
under H(y) for low values ofy,while the opposite condition occurs at highvalues ofy.
Stochastic dominance with respect to afunction (SDWRF) is a more discriminating
efficiency criterion that allows for greater flexibility in reflecting preferences, but also
requires more detailed information on those preferences. Formally stated, SDWRF
establishes necessary and sufficient conditions under which the cumulative function F(y)
ispreferred tothecumulative function G(y)by alldecision makerswhose risk attitude lies
anywhere between specified lower and upper bounds. The method is flexible enough to
include and investigate theimpact of any specified value (King &Robison, 1984).
PC-software has become available to perform the stochastic efficiency analyses (Gohet
al., 1989).This was also used to carry out the analyses for the example given in Table
10.1. Results are summarized in Table 10.2,together with the outcome of the previously
discussed criteria.
Table 10.2Outcome according to the various decision criteria (US$).Thepreferred programs

are underlined or indicated with an *
Herd Health Programs
Criteria
Maximin 1000 -10000
Minimax regret 10000 11000
Maximax 9000 19000
Hurwicz a rule (a = 1/2) 5000 4500
Laplace principle of insufficient reason 4667 4667
Expected monetary value 4400 4800
FSD
SSD
SDWRF (withrisk aversion assumed tobe):
- low
- considerable
-high
Table 10.2showsthatchoicesappeartovaryconsiderably amongthecriteria.Themorerisk

averse types of criteria lead to choice of program aj, while with the expected monetary
value criterion (assuming risk neutrality) program a2 is preferred. Under the so-called
'gambling' approach (ie, maximax), program &2 is preferred even more strongly. The
Laplace criterion (usingequalweightsfor alloutcomes) doesnot discriminate between the
two programs. The same applies to most of the stochastic dominance criteria under
141
Chapter 10
consideration. At higher levels of risk aversion (ie, with higher boundaries for the risk
aversion interval), however, program aj is preferred again.
10.5 Bayes'theorem
Most farmers formulate subjective probabilities about uncertain decisions at apoint in time.
If additional information comes available, the farmer has to revise or update the
probabilities. Many farmers appear to revise their subjective probabilities in an informal
manner when they receive weather reports, national production estimates, data on domestic
use and exports, price predictions, and other data that may affect their operation. Such
probability revisions can be accomplished in a logical and mathematically correct manner
by applying Bayes' theorem. Bayes' theorem is an elementary theorem of probability
developed by the eighteenth-century English clergyman Thomas Bayes. This theorem is
normally developed in introductory courses of statistics, and its logical validity is
demonstrated in many books on decision theory (Anderson et al., 1977; Barry, 1984;
Boehlje & Eidman, 1984)
In Table 10.3 the major components that are needed to explain Bayes' theorem are
summarized, some of which have been introduced already earlier in this chapter.
Table 10.3 Summary of the major components of a risky decision problem
a; = the j t n actor action available tothedecision maker

0j = thei"1stateofnatureorpossible event
P(9j) = thepriorprobability ofoccurrence of 0j
Xjj = theconsequence, outcomeorpayoff'thatresults if a; ischosen and 6joccurs
Zjç = the k" 1 possibleforecast from an experiment
PCZJJÖJ) = the likelihood probability of zj^ occurring given that 9j prevails
PCGjIzjj) = the posterior probability of 0j given forecast zj,
c = the cost of the forecast device generating the set {z^} of possible forecasts
Suppose that the farmer in the example of Table 10.1 can obtain a prediction from the
veterinarian of the probabilities of the events 9j. The veterinarian may give k possible
forecasts (k levels of the predictor; z^). Since predictions of uncertain phenomena such as
price and yield levels for agricultural production are less than perfect, it is important to
consider the veterinarian's accuracy of the predictions in revising the prior probability
estimates. The likelihood of obtaining a particular forecast, given the event that occurred
PCzjjIOj), can be obtained by utilizing data on previous forecasts (z) of the veterinarian and
the actual outcomes (9).Then Bayes' theorem can beused tocombine the prior probabilities
P(9j) of the farmer and the data on the accuracy of the prediction P(zjil9j) to estimate the
posterior probabilities P^jlzj,). The posterior probabilities indicate the probability that an
event will occur given the prediction that has been made. Bayes' theorem can be expressed
as:
142
Scopeandconcepts of riskydecision making
P(9ilzk)=P(0i)P(zkl6i)/Si [P(9j)P(zkl9i)]=P(9i,zk)/P(zk)
In words, the first of these formulas says that the posterior probability of the i t h state,
given that the k1*1prediction has been made, is equal to the product of (1) the prior
probability of the state,and (2) the likelihood probability of theprediction given the state,
divided by all suchproducts summed over all the states.As the second formula indicates,
thenumerator attheright-handsideis,by definition,just thejoint probability of 9jand z k ,
while the denomi-nator is the unconditional probability of occurrence of the particular
predictionz k .Ingeneral,Bayes' formula canbeconsidered aposteriorprobability (density)
beingproportionaltopriorprobability (density)timeslikelihood.Bayes' theoremhingeson
the definition of conditional probability (P(AIB)=P(A andB)/P(B)).
Now wecontinue our example on selecting thebest animal health program (Table 10.1).
Thefarmer askstheveterinarian for advice.Basedonpasthistory,thefarmer determinedthe
accuracy of the predictions of the veterinarian. They are outlined inTable 10.4.The data
indicate,for example,that ifzj (good herd health) waspredicted bytheveterinarian inthe
past,agoodherdhealthwasfound in80%ofthecases,anaverageherdhealthin 15%ofthe
cases,andabadherdhealthwasneverfound. Thevaluesinothercolumnsoftheconditional
probability matrix areinterpreted in asimilar manner.
Table 10.4Likelihood probabilities of the veterinarian

Likelihood probabilities P(z[tl0j)
Stateof nature (9j) z^ z2 23
Herdhealthgood 9j Ö8Ö 02Ö ÖÖÖ
Herd health average 0 2 0.15 0.70 0.15
Herd healthbad 0 3 O00 O20 0.80
Thefarmer nowwantstocombinethepredictionsreceivedwiththepriorprobabilitiesusing
Bayes' theorem.Thejoint probabilities required for thenumerator ofBayes' theorem have
beencalculated andrecorded inTable 10.5.Forexample,P(9 1 )P(z 1 l9 1 )=0.2x0.80 =0.16.
After completing the calculation of thejoint probabilities, the denominator of Bayes'
theoremcanbecalculatedbysummingeachcolumn.Forexample,P(z1)=X;P(9j) P(zj10j)
=0.16 +0.09 +0.00=0.25.Noticethat summing theP(zk) for allvalues of kequals 1.
Table 10.5Calculation of the joint probabilities

Joint probabilities P(9j)P(zkl9j)
State of nature (9j) z
1 z
2 z
3
Herd health good 9 j 0.16 0.04 0.00
Herd health average 9 2 0.09 0.42 0.09
Herd health bad 0 3 0.00 0.04 0.16
P(z k ) 0.25 0.50 0.25
143
Chapter 10
FollowingBayes' theorem,theposteriorprobabilitiescanbecalculatedbydividingthejoint
probabilities by the unconditional probability of z k . For example,P(0jlzj) =0.16 /0.25 =
0.64.Theposterior probabilities aregiven inTable 10.6.
Table 10.6Calculation of the posterior probabilities

Posterior probabilities P(9jlz|<)
State of nature (6;) z
1 z
2 z
3
Herd health good 9 j 0.64 0.08 0.00
Herd health average 62 0.36 0.84 0.36
Herd health bad 9 3 0.00 0.08 0.64
Theposteriorprobabilitiesreplacethepriorprobabilitiesestimated inTable 10.1.However,

herearethreesetsofposteriorprobabilities,oneforeachpredictedhealthsituation (zk).The
next stepistocalculate the EMV for each action using each set of posterior probabilities.
For this,we first have torecalculate the payoff matrix taking into account the costs (c)of
obtaining theprediction. Suppose thatcequalsUS$200.
The results obtained, which arebased onthepayoff valuesof Table 10.1and information
cost of US$200, are shown in Table 10.7.For instance, the EMV of program aj given
forecast zx is calculated as 1000x0.64 +4000 x0.36 +9000 x0.00 -200= US$(2080 -
200)= US$1880.Furtherinspection ofTable 10.7indicatesthataj hasthehighestEMV for
prediction of zj (denoted by underlining), while a2has the highest EMV if Z2and Z3are
predicted. Thus the optimal strategy s for the farmer is {aj, z.^,a2), meaning the farmer
will maximize EMV by selecting program aj if zj ispredicted, and selecting program a2
if either Z2 orZ3ispredicted. This optimal strategy s isalsocalled Bayes' strategy.
Table 10.7EMVsbased on posterior probability of 9/ given forecast zk and information costc

Forecast
EMV a zj z
2 z
3
Program a{: EMV^IzjJ 1880 3960 7000
Program a2:EMV(a2lzk) -4800 4720 13760
a
Calculated asEMV(a;lzk) =I j [(XJ; -c) P(9jlzk)]
10.6 Value of information

It is reasonable to ask whether the use of the predictor will increase the farmer's EMV.
Moreover, there is acharge for veterinary services (cost cof theprediction). Afarmer will
like toknow whether theincrease inEMVexceeds thecost of the service.These questions
can be answered by comparing the EMV using the optimal strategy with the predictor
(Bayes' strategy) and theEMV for theoptimal action without the predictor. Ifthis value is
negative, then the additional information provided bytheforecast is not worth purchasing.
The maximum pricethat should bepaid for theforecast isgivenbythevalueofcfor which
these twoEMVs (with andwithout the additional information) areexactly the same.
144
Now consider thecaseof aperfectly forecasting veterinarian. Since aperfect predictor is

never wrong,itimplies aposterior probability distribution of unity for some stateof nature
and zero for the rest. Thus, using a prime to denote perfection, there is a one-to-one
correspondence between the k*"perfect forecast signal z k ' and some state of nature, say
0j, so that wecan denote the k tn perfect forecast by zj'. Further, by Bayes' theorem P(z j')
=P(6j). With aperfect forecast device the optimal act can always be chosen. This results
inthe EMV of aperfect predictor. TheEMV ofperfect information can thenbe calculated
as the difference between the EMV of the perfect predictor and the EMV without the
predictor (ie,without additional information).
Let us return to our animal health example. The EMV of the optimal strategy with the
additional information from the veterinarian, the Bayes' strategy s {a^, ^ ^ equals
US$6270(seeTable 10.8). AstheEMVoftheoptimal decisionwithoutthepredictor (a2>is
US$4800 (seeprevious section andTable 10.8),theEMV of the forecast device turns out
tobeUS$6270-4800=US$1470.Becausethisvalueispositive,theadditional information
expected from theforecast device isworth purchasing.
Table 10.8Value of information (in US$)

EMV of optimal decision (aj) without additional information:
Maxj [XyP(9i)]=-10000x0.2 +5000x0.6 + 19000 x0.2 =4800a
EMV of optimal (Bayes') strategy (s = {aj, &2< a 2 ^ w ' m additional information:
I k [maxj EMV(ajlzk)] P(zk)= 1880x0.25 +4720x0.50 + 13760x0.25 = 6270b
EMV forecast device:6270-4800= 1470
EMV oftheoptimal strategy based upon perfect predictor (ZJ'):
I j [maxjEMV(Xjj -clzj') P(8j) =800x0.2 +4800x0.6 + 18800x0.2 = 6800c
EMV of perfect predictor: 6800-4800=2000
SeeTable 10.1for P(9j) andxy

bi
SeeTable 10.5for P(zk) andTable 10.7for s" and thecorresponding EMVs
c
SeeTable 10.1for P(0j) andxy-;c=US$200
The EMV of the optimal strategy based upon aperfect predictor is also determined in
Table 10.8.TheEMV of suchperfect information isUS$6800. So,theEMV of the perfect
predictorisUS$6800-4800=US$2000.Thismakestheefficiency ofourpredictorrelative
toaperfect predictor,bothassumed tocostUS$200,(1470/ 2000)x 100%=73.5%.
145
Chapter 10
Work through the example on decision analysis, a left-displaced abomasum case,in Chapter
19.For three different strategies, the payoff matrix isgiven. You have to find the best strategy
according to different criteria: the EMV, the maximin, the minimax regret and the maximax
criterion (as discussed in section 10.4).In the next part of the model you canpractise working
with a utility function and 'translating' this into risk attitude (seesection 10.3). Lastly, the
model leadsyou through the Bayes'theorem (seesection 10.5)and calculations will be made
on the value of information (see section 10.6). The time needed for this exercise is
approximately 60 minutes.
10.7 Multiperson decision making

The model of risky choice,asoutlined above,relatesprimarily to asituation wherethereis
one decision maker whosebeliefs and preferences aretobeused in the analysis and who
bears the consequences of the choice. Often, however, more than one person will be
involved inanydecision and/or affected bytheconsequences.Unfortunately, theextension
ofthemethodsofdecisionanalysistomultiperson decisionproblemsisnotasimplematter.
Three multiperson decision situations can be considered of particular importance in
agriculture: (1) group choice situations, wherein a number of people are collectively
responsible for adecision, (2) situations with many individual and independent decision
makers,and(3)socialchoicesituations,wherethepowerofdecisionrestswithgovernment
oroneofitsagencies,butwheremanypeopleareaffected bytheconsequences.Thelastone
especially relatestocompulsoryprogramsforcontagiousdiseasecontrol and,therefore, will
nowbediscussed inmoredetail.
Policymakers often tendtoreactinarisk-aversefashion, fearing thepersonal consequences
of being seen to have made decisions that turned out bad. The uncertainties of particular
publicprojects orprograms,however,areoften ratherinsignificant whenmeasured against
the total performance of the economy. That is why economic theory teaches that
governments make the best economic choice among risky projects by using risk-neutral
decision rules, such asthe expected monetary value criterion (Little &Mirrlees, 1974).
There are two major reasons toconsider risk-related decision rules tobe appropriate for
the choice among projects: (1) when they areunusually large, eg,affecting 10%or more
ofnationalincome,or(2)whentheirconsequencesarenotspreadwidely,andfairly evenly,
among the population. The latter will often apply tocontagious disease outbreaks, since
losses primarily affect producers' income, especially on farms and inthose areas that are
actually affected by the disease (Berentsen etal., 1990).Abetter insight into the potential
consequences of the various decision rules and risk attitudes may be helpful anyway to
provide useful information for amore thoughtful and rational decision-making approach.
Stochastic dominance with respect to a function is commonly considered the most
promising approach inthis type of analysis,but requires at least some information on the
policymakers' preferences concerning theoutcomes.Empirical research todetermine these
preferences in agriculture hasbeen sparse sofar.
146

Riskand uncertainty areundoubtedly important inanimal health management. Advice and
modelling that are to support decisions in this area, therefore, should include appropriate
(subjective) probability estimates for therelevant variables under consideration. Decision
analysis and Bayes' theorem are considered worthwhile approaches for ensuring that
farmers get advice and make decisions which areconsistent with (a)their personal beliefs
about the risks anduncertainties surrounding the decision, and (b)theirpreferences for the
possible outcomes.Itcan alsohelp toprovide amorerational basis for decision making in
thepublicdomain,andtodetermine theeconomicvalueofadditional information toreduce
and/or predict the risks and uncertainties. A good risky decision, however, does not
guarantee agood outcome. That would only bepossible with perfect foresight (ie,in the
absence ofuncertainty).Itdoesassure,however,thatthedecision made isthebest possible
one given theavailable information.
Appropriate decision rules areconsidered amajor component of ariskydecision problem
(Boehlje &Eidman, 1984).The most widely used expected monetary valuecriterion does
not alwaystellthe whole story,as shown inthe -simplified -example in thischapter. Less
advanced criteria (such asmaximin orminimax)areconsidered nottobeappropriate from
a theoretical point of view. Utility functions make it possible to provide the most
comprehensive approach, including a trade-off between the average outcome and its
variation,butwillnotalwaysbeeasytocarryoutandapplyinactualfieldadvice.Stochastic
dominance criteriaarecommonly consideredpromisingtoolsinthistypeof analysis.User-
friendly software has become available tomake the application of this type of advanced
criteria much easier andaccessible (Gohetal.,1989).
References
Anderson,J.R., Dillon,J.L.& Hardaker,J.B., 1977.Agricultural decision analysis.IowaState
UniversityPress,Ames,344pp.
Barry,RJ.(ed.), 1984.Riskmanagement inagriculture.IowaStateUniversity Press,Ames,282

pp.
Berentsen,P.B.M.,Dijkhuizen, A.A.& Oskam,A.J., 1990.Foot-and-mouth disease andexport.

WageningenEconomicStudiesNo.20,Pudoc,Wageningen,89 pp.
Boehlje,M.D.& Eidman,V.R., 1984. Farmmanagement.JohnWiley& Sons,NewYork,806pp.
Goh,S.,Shih,C.C.,Cochran,M.J. &Raskin,R.,1989.Ageneralizedstochasticdominanceprogram
fortheIBMPC.SouthernJournalofAgriculturalEconomics:175-182.
King,R.P.&Robison,L.J., 1984. Riskefficiency models.In: Barry,P.J.(ed.):Riskmanagementin

agriculture.IowaStateUniversityPress,Ames,p.68-81.
147
Chapter 10
Little, I.M.D. &Mirrlees, J.A., 1974. Project appraisal and planning for developing countries.
Heinemann Educational Books,London, 388pp.
Smidts, A., 1990.Decision making under risk. Wageningen Economic Studies No. 18, Pudoc,
Wageningen, 329pp.
148
11
Application of portfolio theory for the optimal choice of
on-farm veterinary management programs
D.T. Galligan 1 ) &W.E. Marsh 2 )

1)Center for Animal Health and Productivity, University of Pennsylvania, School of Veterinary
Medicine, New Bolton Center, Kennett Square, Pennsylvania, USA
2) Department of Clinical and Population Sciences, College of Veterinary Medicine, University
of Minnesota, StPaul,MN, USA
Objectives
From thischapter thereader should gainknowledge of:
• the application ofportfolio theory totheefficient selection of veterinary interventions
• theuse of mathematical programming techniques to identify the optimal combinations of
interventions which maximize expected financial returns whileminimizing risk
The chapter emphasizes the importance of including risk in addition to expected return
whenconsidering investment inon-farm veterinary services.
11.1 introduction
The health management approach to the delivery of veterinary services has expanded
greatly, providing significant economic benefits to dairy producers. Veterinarians are
becomingincreasingly awareoftheneedtoconsidertheeconomicconsequences ofplanned
interventions for the farm business when designing herd health programs for farms
(Dijkhuizen, 1992).
The decision-making process regarding investment in veterinary services is essentially
similar to other farm management decisions which allocate land, labour and capital
resources toalternative uses,theobjective being tomaximize net returns tothe manager's
owned resources.Economic conceptstraditionally used for farm planning procedures such
asthefactor-product, factor-factor andproduct-productmodelshaveassumedeither perfect
knowledge of input-output andpricerelationships ortheuseof expected values. Inreality,
managersof agriculturalbusinessesareconstantly obligedtomakedecisionswithlessthan
perfect knowledge.Typically, they have only partial information on anumber of possible
outcomes and some feeling for theprobability of each occurring over the planning period
under consideration.
Expected return on investment is acommonly utilized measure of the relative economic
worthofveterinary services(Ellis&James, 1979;Ngategize &Kaneene, 1985).The major
assumption of thisapproach isthat the variance of returns across all interventions isequal.
Thisassumption isinappropriatewhenconsidering veterinary interventions,astheinherent
149
Chapter 11
biological variation of livestock production systemscanoften mask themoresubtle effects

of management changes designed to change production efficiency. Therefore, a more
rigorous approach to the compilation of a herd health program as a mix of veterinary
services should consider both expected outcomes and the degree of variability associated
with each. The objective of this procedure is to determine the points where the trade-off
between the dual objectives of maximizing expected return and minimizing risk is
compatible with theherd manager's goals and attitude towardsbearing risk.
Portfolio theory (Markowitz, 1952;Sharpe, 1970;Anderson etal, 1977;Schneeberger et
al, 1982)evolved toaddress theproblem of finding theportfolios (combinations of stocks,
bonds,Treasurybillsandotherfinancialinstruments),designedtoconcomitantly maximize
expected return oninvestment while minimizing risk. Inthis context, risk is defined asthe
variance (or standard deviation) of expected returns.
11.2 Simulation data

Monte Carlo simulation (as described in Chapter 9)was used toinvestigate the economic
consequences of six hypothetical components of aherd health program. The following
productionparameters werecalculated for a 140-cowdairyherd servedbytheUniversityof
Pennsylvania Veterinary Services: heat detection efficiency (%), first- and other-service
conception rates (%),average age of first breeding of heifers (months),calf and heifer
mortality (%), somatic cell count linear score (SCC) and grain to milk ratio (kg of grain
fed per kgof milk produced.) Data describing age,reproductive and production statusof
every female bovineinthemilking and replacement herdatthetimeofthefarm visit were
collected and transcribed into a computer data file. Individual animal data in this file
provided the demographic information of the herd upon which the simulation exercises
were carried out.
In order toestablish the likely performance of this herd without imposing aherd health
program,production wassimulatedfor afive-yearperiod,usingtheestimatedcurrent levels
ofperformance. Theprocesswasreplicatedfivetimesusingdifferent randomnumberseeds.
Results from each set of runs were used to determine the expected value (mean) and
standard deviation (risk)ofperformance indicators andprofitability of the enterprise.
Next, a set of veterinary control programs were devised to improve the sixparameters of
herd performance noted above.Theexpected improvements wereestimated from accounts
of similar control programs reported in theliterature and were felt tobe achievable on this
farm. Cost for each intervention was based on fees charged by the University of
Pennsylvania, School of Veterinary Medicine and were assumed constant. It was also
assumed thateach intervention couldbe invested inincrementalunitsandthatthe marginal
response was constant.
150
Application of portfoliotheoryforthe optimalchoiceof on-farmveterinary management programs
Table 11.1Estimated annual cost of simulated veterinary interventions

Annual Cost (USS)
Feasible interventions 140-cow herd
1. Improving heat detection from 45%to70% 4655
Theheat detection rate couldbeimproved over this
rangeby theuseof detection aidsand increasing
observation timeby2hours/day
2.Improving conception rate 2900
First service:26%to 45%
Other service: 36%to45%
Byroutine identification ofcows ready tobreed
3.Replacement heifer management 500
Lowering theminimum first breeding ageof heifers
from 600to450days (18to 15 months)by improved
monitoring of weight andheight
4. Reducing calf mortality losses 400
5% to 1%mortality,by improved colostrum manage-
ment and administration
5.Improving mastitis control 500
Reducing somaticcellcount (SCC)codefrom 5to
4by improved mastitiscontrolthroughculturing clini-
cal cases androutine milking machine and procedure
evaluation
6.Improving dairy nutrition 500
Reducing thegrain tomilkratioby 10.7%(0.56to 0.50
kgof grain perkgof milk),byutilizing anutritional
consultant androutine forage analysis
Simulationsinvolved imposingeachintervention singlyontheherdforthefive-year period,

with five replications.Each intervention considered ispresented inTable 11.1with abrief
description of the procedures involved and the annual cost for the cooperating 140-cow
herd.
Foreachreplication ofeachalternative,theenterpriseannualgrossmarginforeachofthefive
simulatedyearswascalculated.These,inturn,werediscounted toprovidenetpresentvalues.
Grossmarginisdefinedascashincomeminusvariableexpenses.Cashincomeincludedreceipts
from thesaleofmilk,calves,cullcowsand surplusreplacement heifers. Variable expenses
included all feed and hired labour expenses, replacement heifer purchases, breeding fees,
veterinary and medical expenses, utilities, fuel and supplies. Net present values of each
replication wereconverted toannuitiestoprovide asetoffivesingle dollar amounts which
representedarangeofexpectedfinancialreturnsforeachalternative.Fromeachsetofvalues,the
expectedvalue(mean)andrisk(standarddeviation)werecomputedtoprovideestimatesofthe
annualenterprisegrossmarginoverthefive-yearplanningperiodundereachregime(Table11.2).
151
Chapter 11
Table 11.2Simulated five-year gross margin annuity values (US$/year) for dairy enterprise
under eachproposed intervention
Proposed interventions
Heat Conception Heifers Calf Mastitis Dairy
Run Control detection mortality nutrition
1 134993 190154 178937 137045 152446 144678 154638
2 146196 195844 188565 140752 142933 151557 165727
3 135966 190963 186326 149423 137449 145259 149000
4 132083 193430 176154 155848 137691 137238 155016
5 138449 192247 167140 147827 133477 158329 155340
Mean 137537 192528 179424 146179 140799 147412 155944

s.d. 4785 1999 7655 6627 6553 7099 5420
The difference in the annuity values between each intervention and the control option
provides an estimate of their gross value.The Expected Return OnInvestment (EROI)
was expressed astheratio of thenet valueof theintervention divided by the annuity value
equal tothe cost of theprogram overthe five-year period. For example, theprocedure to
estimate thevalueof improving heat detection efficiency from 45% to70%is as follows:
Enterprise gross margin underintervention US$ 192528
Enterprise grossmargin for control situation US$ 137537
Increaseingross margin attributed tointervention US$ 54991
Annual cost of implementing intervention US$ 4655
Expected return oninvestment (EROI) =(USS54991-USS4655)/US$4655 = 10.81

Standarddeviation (s.d.)= 1.114
Expected values and associated standard deviations for each proposed intervention are
shown inTable 11.3.Thesedataareused inthe application ofportfolio theory todevise a
total herd healthprogram for this herd.
Table 71.3Expected return and risk attributes of proposed interventions

Proposed interventions
Heat Conception Heifers Calf Mastitis Dairy
detection mortality nutrition
EROI 10.81 13.44 16.28 7.16 18.75 35.81
s.d. 1.114 3.113 16.385 20.285 17.112 14.459
11.3 Portfolio model

Thereturn and risk attributes of atotal herd health program aredetermined by the number
and mix of interventions included, and, specifically, bythe proportion of available funds
invested ineach intervention. Portfolios exhibiting thelowest degree risk for agiven level
of return are considered most efficient. Selection of interventions from this efficient set
152
Application of portfolio theory for the optimal choiceof on-farm veterinary management programs
will depend on the farmer's attitude towards risk. Studies have shown farmers tobe risk
averseintheirselectionofinterventions(Binswanger, 1980;Dillon&Scandizzo, 1978).For
therisk averse, anyincrease inriskmustbeoffset by anappropriateincrease inreturn:the
morerisk averse aparticular individual becomes, the greater an increase in return will be
required to counteract the extra riskiness. Regardless of the decision maker's risk
preference, itis always desirable toselectintervention combinations from theefficient set.
To find the risk-efficient (E-V) frontier (minimum variance for each expected return),
quadraticprogramming canbe applied (Schrage, 1984):
MinimizeV =x'Q
subject to:
rx >= E R O I r m m m u m
Ax <=b
X >=0
where
V =thevariance of themix;
x =thevector of solutions;
r =agiven vectorwith theexpected returnsof theinterventions;
Q =a given matrix of variances and covariances across the
interventions;
A =agivencoefficient matrix ofconstraints;
b =agivenvector of theright-hand sides of theconstraints; and
EROI. =the minimum expected return on investment that would be
minimum
acceptable.
Usingthedatafrom Table 11.3,wehave:
Vectorof Expected Returns:
10,81
13,44
16,35
7,16
18,75
35,81
153
Chapter11
Covariance Matrix:
1.24 0 0 0 0 0
0 9.69 0 0 0 0
0 0 267.28 0 0 0
Q=
0 0 0 411.49 0 0
0 0 0 0 293.17 0
0 0 0 0 0 209.09
Note that the covariance terms in Qare zero. This isbecause of the assumption that the
interventions considered are assumed to be independent. The objective is to find the
combination (portfolio) ofthe sixpossible interventions that minimizes thetotalvariance:
V=x'Qx
Then t n element ofthesolution vector x, x n ,istheproportion of funds thatistobeinvested

inthen tJl intervention.
Thenatureofquadraticprogramming permitstheproblemtobedefined morestrictlybythe
specification offurther constraints.Forexample,the constraint:
Ixn =1 n= 1,2,..6
ensuresthatx'beexpressedasapercentageofavailablefunds.Anotherconstraintmaylimit
investment in any individual intervention to some percentage of available funds. In this
case,we setthelimit at50%:
x n <0.50 n = l , 2 , ..6
The final constraint tobe imposed on thisproblem ensures that the expected return on
investment (EROI)ofthe solution is above aminimum desired level:
rx >EROI
minimum
Specifying aminimum return oninvestment of 10,theproblem iswritten as:
MINIMIZE: l ^ x ^ 2 +9.69(x2)2 +267.28(x3)2 +411.49(x4)2 +293.18(x5)2+

209.08(x 6 r
subject to
xj +X2 +X3 +X4 +X5 +xg= 1
0 < x j <0.50
0 <x 2 <0.50
154
Application of portfolio theory for the optimal choice of on-farm veterinary management programs
0<x 3 <0.50
0 <x 4 <0.50
0<x5<0.50
0<x6<0.50
10.81(x,)+ 13.44(x2)+ 16.28(x3)+7.16(x4)+ 18.75(x5)+35.81(x6) > 10
Quadratic programming wasused to solve this problem. Thelinear programming package

used was LINDO(Linear, INteractive,Discrete Optimizor) (Schrage, 1984).The solution
is:
xj =0.50 -improveheat detection
X2 =0.44 -improveconception rates
X3 =0.02 -reducebreeding ageofreplacement heifers
X4 =0.01-reducecalf mortality
X5 =0.01 -improvemastitis control
xg=0.02 -nutritional consulting
As the coefficients inthe solution sumto unity, they indicate the number of cents in each
available dollar that should be invested in each component of the dairy veterinary
management programfor thisherd.Ifthisisdone,thereturn andriskcharacteristics of the
program willbe:
expected return: rx' =US$12.64 perUS$1.00 invested

variance: (x'Q) =2.43
standard deviation: (risk) =US$1.56
11.4 Parametric analysis

When presented withtheoptimal mixof veterinary services,afanner may be interested in
how the solution might change asagreater minimum return oninvestment was demanded
( E R O I m m j m u m ) . Parametric analysis in linear programming is atechnique that allows
one to trace out how the solution changes as a specific coefficient changes (Hillier &
Lieberman, 1990).Parametric analysis allows one totest the sensitivity of the solution to
varying levels oftheright-hand sidevalue for any given constraint.
In our problem, the minimum expected return constraint (EROI m j n j m u m ) was varied
between the limits of US$8.99 and US$27.28.Theportfolio atthe lowerbound comprised
a combination of the two interventions with the lowest expected return on investment:
reducing calf mortality (7.16) and improving heat detection efficiency (10.81). At the
upper bound, the portfolio consisted of improving mastitis control (18.75) and dairy
nutrition (35.81).Thecombination withthesmallest variance (V)wasfound for successive
values of expected returnbetween theboundaries.
The solution for thevalues atwhich thebasis changes, ie,thepoints inthe E-V frontier at
which an intervention entersorleavesthe quadratic linearprogram solution, is shown in
Table 11.4.For example, reading from left toright, 'calf mortality' leaves the solution at
155
Chapter 11
an expected return on investment (EROI) of 14.09.Similarly, 'heat detection' falls out at

EROIis22.05.Lastly, 'heifer rearing' isdropped atEROI=27.28,where50centsineach
dollarshouldbespenton 'mastitiscontrol' and 'dairynutrition' respectively. Otheroptimal
solutions occurringbetween thesepoints areobtainedbylinear interpolation.
Table 11.4Percentage composition of efficient herd health programs from results of

parametric analysis
Efficient herd health programs
Interventions 1 2 3 4 5
Heat detection 0.50 0.50 — — —
Conception rates 0.44 0.38 0.50 — —
Heifer rearing 0.02 0.02 0.06 0.11 —
Calf mortality 0.01 — — — —
Mastitis control 0.01 0.02 0.08 0.38 0.50
Dairy nutrition 0.02 0.08 0.36 0.50 0.50
EROI 12.64 14.09 22.05 26.82 27.28

s.d. (risk) 1.56 1.81 5.67 9.51 11.21
Agraph of theefficient sets of intervention combinations (programs 1-5 in Table 11.4)is

shown asthelinemarked with 'crosses' (x)inFigure 11.1.These programsrepresent the
most efficient combinations, offering the highest return atanyrisklevel.Farmers whoare
c 30
3v.
+•>
0>
^
•o 25
0)
01
CL
* 20
15
10
0 1 2 3 4 5 6 7 8 9 10 11 12 13
Standard deviation (risk)
Figure 11.1Expected return (US$) and risk (US$) associated with alternate efficient dairy
veterinary management programs
156
Application of portfolio theoryforthe optimalchoiceof on-farm veterinary management programs
risk averse would alwaysprefer toselectportfolios from theefficient set.

Afurther aspectofriskmanagement istoensurethatreturnsneverfall below acertain level.
The line marked with little squares (•) shows the lower 95%confidence bound for the
efficiency frontier, obtained by subtracting 1.96 standard deviations from the expected
returns ofeach efficient portfolio.
The interventions that were selected for investigation were considered to operate
independently of each other, and thus their correlation coefficients were all zero.This is
not a necessary condition for risk reduction through diversification of interventions.
Correlation coefficients range from -1to +1, wherepairsof interventions with correlation
coefficients of -1 hold the greatest opportunity for risk reduction. In Figure 11.2, the
expected return andrisk of thecombinations of 'mastitis control' and 'heifer rearing' are
shown under varying degrees of correlation. Thegreatest risk reduction occurs when the
correlation coefficient is ataminimum of -1.
c 19 - 100% Mastitis
3
+•>
CD
"O
CD
+•"
u<D
8- I«'
17
100% Heifer rearing

16
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Standard deviation (risk)
Figure 11.2Expected return (US$)and risk of two interventionsimastitis control and heifer
rearing
References
Anderson,J.R., Dillon,J.L.& Hardaker,J.B., 1977.Agricultural decision analysis.IowaState
UniversityPress,Ames,344pp.
Binswanger,H., 1980.Attitudestowardrisk:experimentalmeasurement inruralIndia.American

JournalofAgriculturalEconomics62: 395-407.
157
Chapter11
Dijkhuizen, A.A., 1992. Modelling animal health economics. Inaugural speech, Wageningen
Agricultural University,Wageningen, 28pp.
Dillon, J.L. &Scandizzo, P., 1978.Risk attitudes of subsistence farmers in Northeast Brazil: A
sampling approach. American Journal of Agricultural Economics 60:425-435.
Ellis, P.R. & James, A.D., 1979. The economics of animal health - (1) Major disease control
programmes.TheVeterinary Record: 504-506.
Hillier,F.S.&Lieberman,G.J., 1990.Introduction tooperationsresearch.McGraw-Hill, New York,

954pp.
Markowitz, H.M., 1952.Portfolio selection.Journal ofFinance7: 77-91.
Marsh, W.E., 1986.Economic decision making on health and management in livestock herds:
examining complex problems through computer simulation.PhD-Thesis,University of Minnesota,
St.Paul, 304pp.
Marsh, W.E., Dijkhuizen, A.A. &Morris, R.S., 1987.An economic comparison of four culling
decision rulesforreproductivefailure intheUnited StatesdairyherdsusingDairyORACLE. Journal
of Dairy Science70: 1274-1280.
Ngategize, P.K. &Kaneene,J.B., 1985.Evaluation of theeconomic impact of animal diseases on

production: areview.Commonwealth Bureau ofAnimalHealth,Veterinary Bulletin 55:153-163.
Schrage, L. (ed.), 1984.Linear, integer, and quadratic programming with Lindo. The Scientific
Press, Palo Alto,California, pp.206-223.
Sharpe, W.F.(ed.), 1970.Portfolio theory and capital markets.McGraw-Hill, pp. 18-69.
158
12
Modelling the economics of risky decision making in
highly contagious disease control
A.A. Dijkhuizen 1 ), A.W. Jalvingh 1 ), P.B.M. Berentsen 1 ) &A.J.Oskam2)

Netherlands
2) Department of Agricultural Economics and Policy, Wageningen Agricultural University,
Wageningen, the Netherlands
Objectives
Fromthischapterthereader should gainknowledge of:
• thebasic theory of demand and supply
• theconcept of producerandconsumer surplus
• the economic principles of quantifying the indirect losses due toexport bans incase of
contagious animal diseases
The approach isillustrated for foot-and-mouth disease outbreaks.
12.1 Introduction
In Chapter 2on 'economic decision making in animal health management' it was shown
that aproducer's optimal level of output is determined by input prices,efficiency of the
inputs used and output prices. Given sufficient data concerning afirm's production, it is
possible to construct theproduction functions, andfrom those the average and marginal
physicalproducts.Ifalsotheoutputpricesareknown,thetotal,averageandmarginal return
functions can be determined. These functions permit the location of the optimal (profit
maximization) levelofproduction for anindividual firm.
Going beyond this, it is of interest to see how the input and output prices faced by the
producer are determined. In market economies these are aresult of demand and supply.
Demand istherelationshipbetween themarketpriceof agoodorserviceand thequantity
people are willing and able to buy. Supply is the relationship between the market price
andthequantityproducersareableandwillingtosell.Thestudyofdemandandsupply,and
thewaythey interact,forms afundamental partofeconomics (Hill, 1980).
Inthischapter,thedevelopment andinteractionsofdemand andsupplyareexamined. Special
attentionisfocused ondeterminingthelossesduetomarketdisruptionsbecauseofexportbans.
Thebasicunderlyingprinciplesoftheselossesarepresentedanddiscussed,andillustrated for
foot-and-mouth disease(FMD)outbreaksintheNetherlands (Berentsen eta/.,1990).
159
Chapter 12
12.2 Demand andsupply -the price mechanism in amarket economy

It is common practice, and an invaluable aid to comprehension, toexpress demand and
supply schedules ingraphical form,withpricesonthevertical axisandquantity ontheother
(see Figure 12.1). Such a graph is often called the scissors graph because of its shape;
most demand curves slope downwards from left to right - more of the commodity is
demanded asprice falls -whereas supply curves slope upwards from left toright -more is
supplied as price rises.Where the two curves cross is the equilibrium price at which the
quantities demanded and supplied areinexactbalance.
Price
Quantity
Figure 12.1Demand (D)and Supply (S) curves
Ameasure of the responsiveness of the quantity demanded or supplied to changes in the

market price of that good is referred to as the price elasticity of demand or supply'
respectively. Specifically, itisthepercentage change inquantity divided by the percentage
change in price.If the percentage change inprice affects alarger percentage change in
quantity,thedemandorsupplycurveiscalledelastic(ie,pricesensitive).Inelastic response
refers toa smaller percentage change in quantity resulting from agiven change in price.
Agricultural products arecharacterized by rather steep (ie,inelastic) demand and supply
curves (Hill, 1980).In other words relatively small changes in quantities may have large
price effects.
The areabetween the supply and demand curvestothe left oftheirpoint of intersection is
very important withrespect totheindirect lossesfrom disease (Howe&Mclnerney, 1987).
160
Modellingthe economicsof riskydecision making inhighlycontagious disease control
Itprovidesbasicinformation onthewelfare effects forproducers,consumersandthesociety

as awhole.For instance, the supply curve tells usthat some producers would have been
willing toproduce in return for prices below P e . Togive an example, in Figure 12.1 the
production of Qj units of output would have been realized for aprice as low as P j . In
practice,allofthoseunitsofoutputwhichcomprisethetotalofQj sell atpriceP e . Because
themarket determined aunitpriceof anycommodity asavaluation, somefarmers actually
obtain more value (orbenefit) from the sale of their products than they might necessarily
have sought or expected. In other words, they obtain akind of economic surplus. Tobe
precise,this surplus equals P e -Pi, notfor thetotalproduction Qj but for the marginal unit
of output at Qj. When adding up the surpluses associated with all other units of output
between theorigin andequilibrium output Q e , the total economic surplus is given by the
areaY+ZinFigure 12.1.Thistotal areameasureswhat,for fairly obviousreasons,iscalled
the producer surplus.By analogy,consumer surplus isequal toarea X. All consumers
pay P e for each unit of theproduct,but some would be willing to pay more if supply was
lessabundant.Theyneednotdosointhecircumstancesdescribed,andsotheybenefit from
getting theirproduct cheaper than otherwise.
Price
F-
Qe Quantity
Figure 12.2The change in consumer and producer surplus after reaching a new market
equilibrium
161
Chapter 12
Bythesametoken,effective controlofanimaldiseaseincreasesthe(long-term)productivity
of resources in the affected population. The outcome is to shift the supply curve for
livestock products to the right, ie, farmers are able to produce more at whatever is the
current price.Thisisillustrated inFigure 12.2
Thewelfare consequences of thechangeinFigure 12.2canbe summarized as follows:
Gain Loss Net

Producers I+J+K F+I J+K-F
Consumers F+G+H — F+G+H
Society (I+J+K+F+G+H) (F+I) (J+K+G+H)
Notice that it is not only possible toidentify the net effects on producers and consumers
respectively, but that it is also possible to summarize theconsequences for a society asa
whole,ie,forpeopleirrespectiveofwhethertheyareproducers,consumersorboth.Within
the theory of welfare economics, however, there is adiscussion about the aggregation of
benefits andcostsatthenationallevel(Justetai, 1982).Simpleaggregationofthese effects
presumes an equal weight of benefits and costs for each group and individual, which is
usually notthecase.Fromaninvestigation ofEUdairypolicyovertheyears 1980to 1987,
for instance,itemergedthatonedollarofproducerincomewasconsidered twicetheweight
ofonedollarofconsumerincome(Oskam, 1988).Itis,therefore, recommendable toreport
both the separate effects for producers and consumers, and their equally-weighed total,
leavingpolicymakers theopportunity toinclude theirownweights.
12.3 Determiningthe indirecteffectsdueto exportbans

Outbreaks of contagious animal diseases are understandably feared, especially in major
exportingcountriessuchastheNetherlands.Controlofthistypeofdiseasegoesbeyondthe
influence of the individual farmer, and needs to be carried out at national or even
international level. To make economically sound decisions on this type of control, an
integrated approachisrequiredthatincludestheeffects ofdifferent conditionsandscenarios
considering (1)the spreadof thedisease, (2)thedirect cost ofprevention and eradication,
and (3)theindirect effects duetoexportbans.Research publications inthisfield are sparse
and hardly gobeyond the first two stages. Therefore, research was started to develop a
method for quantifying andincluding theindirect losses owing toexportbans (Berentsen
etai, 1990).
Thebasic principle for determining theindirect effects due toexport bans isillustrated in
Figure 12.3.Thisfigureshowsthesupplycurve(S)andthedemandcurve(D)for acountry,
exporting acertain product. At thebasic price level P,producers supply amount Q s , while
consumers demand amount Qj, withthe difference (Qs-Q^) being exported.When export
bansareineffect, anewequilibriumwillariseatalowerpricelevel,influencing the welfare
ofbothproducers andconsumers.
162
Modelling theeconomicsof riskydecision making in highlycontagious diseasecontrol
Price
Costs
D ]y S' s
Y
G
A
\1 \B C/
F
0
Qd Qd' Qs' Qs
Quantity
Figure 12.3Themarket situation for a country, exporting a product
Assumingproducers striveafter maximumprofits oncompetitivemarkets,thesupplycurve

(S)isthesameastherisingpartofthemarginalcostcurve,thecurveofwhichwasindicated
in Chapter 2.The producer surplus isformed by the gross returns (quantity times price)
minus thevariable costs (the areaunderthe supply curve).This surpluscanbe considered
thenetreturntofixed inputs.Consequently,thelossestotheproducersduetoadropinprice
from PtoP' is the reduction in producer surplus (area PFCP'). In the short term, alarge
part of thecosts isfixedand the supply curvewill be steep.Withdiseaseoutbreaks that do
not last long,therefore, the vertical supply curve (S') canbe used toquantify the lossesin
producers income.Actual losses tothe producers are reduced by any compensation paid
by the government. Consumers gain from adrop in price, indicated by the increase in
consumersurplus(areaPGBP').Fromthealternativedemandcurve(D')itcanbeconcluded
that the slope of the curve (ie,theprice elasticity of demand) influences the increase in
consumer surplus.
12.4 Foot-and-mouth diseaseoutbreaksasanexample
12.4.1 Framework ofthemodellingapproach

The economic feasibility of continued preventive vaccination is a regular topic for
discussioninmanycountriesstillvaccinating.ThediscussionwithintheEUconcerningthis
subject ledtothedecision tostopannual vaccination inallmembercountries,taking effect
from 1 January 1992. In preparing this decision, research was carried out for the
Netherlands to develop adynamic modelling approach, integrating the epidemiological
andeconomicaspects.First,aMarkovchainmodelwasdesigned inwhichthespreadofthe
disease canbe simulated for different control strategies, inapopulation with and without
preventive vaccination.Fromthespread ofthedisease andthecontrol strategy applied,the
direct economic effects were calculated. Subsequently, thisapproach wasfurther extended
163
Chapter12
by modelling the indirect effects of potential export bans, resulting in a user-friendly

computer modelwhichmakesiteasytodeterminetheimpactofuncertain epidemiological
and economic inputvalues (Berentsen etai, 1990).
In Figure 12.4aflow chart ispresented of theentire modelling approach, including three
submodels (theepidemiological model,thediseasecontrolmodelandtheexportmodel)and
an integrating part. For each of the strategies under consideration the annual costs of
following a specific strategy arecalculated usingthethreemodelsandtheintegrating part.
Strategy Epidemiological < - Input

model data
V
-number of secondary outbreaks
-number of weeks with outbreaks
-extent of affected region
>r
Disease Export
control Input model
model data
i
Direct losses: Indirect losses:

1
- producers - producers
- government - consumers
- government
Input
Integrating part • < —
data
I
Totalyearly national
economic losses
Figure 12.4An overview of the FMD-modelling approach
In the epidemiological model the spread of the disease after a primary outbreak is
simulated, taking into account the control strategy under consideration, disease specific
input values and demographic data. Relevant output tobe used for further -economic -
calculations concerns the number of secondary outbreaks that follow aprimary outbreak,
the number of weeks with outbreaks and the size of theinfected area. The disease control
modelcalculatesthedirectlossestoproducersandgovernment andasksfor additional input
data on the costs of ring vaccination, the costs of stamping out and the costs of idle
production factors for farmers andindustry.Theexportmodelcalculatestheindirect losses
164
Modellingtheeconomicsof riskydecision making in highly contagious diseasecontrol
toproducers, consumers and government andrequires aspecification of: (a)the products,

affected bytradeembargoes, (b)themarketstowhich theseproducts aredelivered, and (c)
the actual reactions onthese markets.Finally, the integrating part is used toquantify the
yearly national economic lossesfrom following the specific strategy,combining the direct
and indirectfinanciallosses.For thesecalculations additional input isrequired on: (1)the
expected frequency ofprimaryoutbreaks,(2)thecostsofyearly routinevaccination,and(3)
the price premium for the products under consideration of getting access to FMD-free
markets.Intheentire modelling approach, about 80input parameters canbe modified.
12.4.2 Assumptions underlying the export model

The export model is product-oriented, ie, the effects of export bans on producer and
consumerincome andonthegovernment budget arecalculated for eachproduct separately
(ie, meat and cattle in case of FMD).In calculating these effects, it is necessary to know
the market structure for each product.The market structure is described by the number of
markets towhich the product isexported andby the following characteristics per market:
the volume of export, the level of consumption, the price elasticity of demand and the
transport costs per unit of product. Forthe domestic market, also import and price of the
product areof importance.
Some countries (such as the USA, Japan and South Korea) do not accept meat from
countries with an annualFMD-vaccination scheme.As aresult theprice for meat paid on
this so-called FMD-free market is about 10%higher than on other markets. This is the
reason to assume that the market structure will change after ceasing annual vaccination.
So, for acorrect evaluation of strategies it is necessary to define a market structure per
product for both, asituation with and without annual vaccination.
In calculating the indirect effects, it is necessary toknow what reactions from importing
countries canbe expected incase of an FMDoutbreak in theNetherlands.Within the EU,
countries usually close their borders for meat and cattle from only the infected area until
four weeks after thelatest outbreak. Somecountries outsidethe EUclose theirborders for
these products from theentire country, until one or twoyears after the latest outbreak. In
simulating the price effects of temporary export bans, the following assumptions are
essential: (1) the reaction of producers to temporary changes in prices.Because an FMD
outbreak islikely tobetemporary, producers areassumed nottoreact tochanges in prices
of agricultural products,and (2) theway in which market prices and quantities react in the
short term tochanges onexport markets. Itisquitenormal in models ofinternational trade
to consider markets completely fluid: if quantity changes, this will be apparent on the
complete market. Such an assumption, however, is not very useful inthe FMD approach
because short-term reactions are not fluid at all. Therefore, the following additional
assumptionsweremade:(a)thereisacapacitylimitforeachexportmarket,which isrelated
totheusual volume oftheexport, (b)increasing exports toaparticular market can only be
realized by means of aprice reduction (derived from the export demand curve for this
particular market), and (c) the storagebehaviour of participants on the market follows a
rational approach: producers store products when the expected future market price minus
165
Chapter 12
the storage costs is higher than the present market price. The basic principles of this
approach areillustrated inFigure 12.5.
Period 1
Domestic market Export marketA Export marketB
Price
PA1
QD1 QD1' EA1 EB1 EB1'
Period2
QD2QD2' EA2 EA2' EB2 EB2'
Figure 12.5Basicprinciples of the export model
Here,country Aimposes anexportban inperiod 1:theexports fall from EA1to0. Owing

to this export ban, domestic prices and export prices decrease from PD1 toPD1' and PB1
to PB1' respectively. The export quantity to country Bis limited to EB1'. Apart of the
production in the first period will be stored (and brought onthe market again inperiod 2).
This storage isjust thatsizethat PD1'plusthestoragecostsequalPD2'.Inperiod2,market
participants face amarket situation with an open export market again for country A.Also
inperiod 2,additional exportstomarketsAandBarelimitedby thecapacity limits (being
set at 10%of the normalexport).
12.4.3 Modelling outcomewith respectto annual vaccination

Table 12.1presents the losses resulting from aprimary outbreak in the Netherlands in a
situation with andwithout annualvaccination respectively.
166
Modelling the economics of risky decision making in highly contagious disease control
Table 12.1Economic lossesresulting froma i primary outbreak

Vaccinated Non-vaccinated
population population
Strategy a la lb IIa Mb Ik
Number of herds removed 33 27 688 240 138
Direct losses (US$ m) 4 4 100 36 20
Weeks with market disruption 60 58 81 112 60
Indirect losses (US$ m) 124 113 370 367 238
of which:
-producer losses 195 179 539 521 350
- consumer losses -71 -66 -169 -154 -112
Total losses (US$ m) 128 117 470 403 258
Annual losses (US$ m) 39 37 26 19 5

a
Stamping out infected farms (la and Ha); stamping out infected farms plus ring
vaccination (lbandlib); stamping outinfected andriskycontact farms (lie).
The highest number of secondary outbreaks occur, as could be expected, in a non-

vaccinated population with stamping outinfected herds astheonly control strategy (Table
12.1).Routine vaccination, however, isnotnecessarily the onlyremedy against adramatic
spread of the disease. The total number of outbreaks and the period of time over which
they occur can alsobe considerably reduced by eradication of risky contact herds aswell
(He).However, itisdoubtful whether public opinion would allow the slaughter of animals
from herds without clinical signsof thedisease.
The calculated direct losses show to be highly related to the length and extent of the
outbreak. The indirect losses are by far the highest in the situation without yearly
vaccination (ascouldbeexpected).Thisismainlycausedbytheconsiderably longer-lasting
reactions ontheFMD-free markets.
Thefinalcomparison ofstrategiesisdoneonayearlybasis,takingintoaccounttheexpected
frequency of primary outbreaks (ie,onceeach 5yearsin avaccinated population and once
each 10years in anon-vaccinated population), the total costs per outbreak, the costs of
yearly vaccination and the extra profits from export to FMD-free markets. Strategies
withoutyearlyvaccinationturnouttobethemostpreferable, despitethehighercostsincase
of outbreaks.
12.4.4 Risky decision making on control strategies

The model of Berentsen etal. (1990)was further used to simulate total losses in anon-
vaccinatedpopulation fortwocontroloptionsunderconsideration,ie,stampingoutandring
vaccination,withoutbreaksoccurringinthreedifferent areasoftheNetherlands considering
herddensity andfivedifferent levelsofdiseasespreadwithineacharea.Herddensity ranges
from relatively low to medium tohigh for Dutch conditions, with 2.1, 3.3 and 4.4 cattle
andpig herds perkm^ respectively.
167
Chapter12
Table 12.2 Simulated losses from a theoretical outbreak of foot-and-mouth disease in a non-
vaccinated population in the Netherlands (US$ m)
regionallivestockdensity(herds per km2)
low (2.1) medi urn (3.3) high(4.4)
Dissem. stamp. ring stamp. ring stamp. ring
rate(i) P(i) out vac. out vac. out vac.
dr-30% 0.05 248 360 282 379 318 390
dr-15% 0.20 279 370 341 392 451 416
default 0.50 326 377 495 416 736 448
dr+15% 0.20 444 394 769 447 1658 500
dr+30% 0.05 591 411 1622 493 3154 577
a
The default values were assumed torange (ie, todecline) from 3.8 in week 1to 0.7 in
week 6and further intheregionwith alowlivestock density,from 4.5tot0.8 incaseofa
medium density,and from 5.3to0.9 inahigh-density region.
Disease spread within each area wasbased ondefault values for the dissemination rate dr
(indicating theaveragenumberoffarms towhichthevirus isspreadbyone affected farm),
aswellasonvaluesthatweresetat 15%and30%aboveandbelowdefault. Probabilities for
these5classesofdissemination ratestooccurwereassumedtobesymmetric,ie,0.05,0.20,
0.50 (default class),0.20 and 0.05 respectively. The simulated outcomes for a theoretical
outbreak of foot-and-mouth diseaseintheNetherlands aresummarized inTable 12.2.
The choice based on the most likely outcome of the deterministic simulation model
(presented under 'default') would be to apply the stamping-out strategy in case of an
outbreak in the area with the low herd density, and ring vaccination in the others. This
choice, however, does nothold for all situations considering disease spread and may lead
to aconsiderable increase of losses in some of the cases.An above-normal dissemination
rate, for instance,would makering vaccination rather than stamping out tobe the strategy
that results in the lowest losses in the area with the lower herd density. A similar (but
opposite) change occurs intheother areas withbelow-average dissemination rates.Thisis
aclassical example, therefore, of decision making under risk and uncertainty. Combining
the simulated losses from Table 12.2 and the stochastic dominance rules, as described in
Chapter 10,provides theoutcomes presented inTable12.3.
The first-degree stochastic dominance rule (FSD) cannot rank the strategies in any of the
areas,becauseeachrespectivepairof cumulative distributions intersects (asshown inTable
12.2).The morepowerful second-degree stochastic dominance rule (SSD) does providea
preference fortheareaswithmediumandhighherddensities(ie,ringvaccination),butnotfor
thelowone.Incaseofarisk-averseattitude,therefore, stamping outnolongerrankshighest
in areas with alowherd density, as was the case with, among other things, the expected
monetary valuecriterion.Stochasticdominance withrespect toafunction (SDWRF) shows,
however,that atthelowerlevelsofrisk aversion the stamping-out strategy is still preferred.
Ringvaccination becomesthedominating strategy whenrisk aversion ishigh.
168
Modellingtheeconomicsof riskydecisionmaking inhighly contagious diseasecontrol
Table 12.3Stochastic dominance rules to rank the control strategies in caseof a theoretical
outbreak of foot-and-mouth disease in a non-vaccinated population in the
Netherlands
regional livestock density (herds per km 2 )
low (2.1) medium (3.3) high (4.4)
stamp. ring stamp. ring stamp. ring
Decision rules out vac. out vac. out vac.
FSD *a * * * * *
SSD * * * *
SDWRF,with risk aversion:
-low * * *
-considerable * * * *
-high * * *
a
Indicates the dominant strategy. With FSD the two strategies turn out to be equally
dominant in all three areas under consideration. The same occurs with SSD and one of
theSWDRF-alternativesinthe areawiththelowherd density.

Indirect losses due toexport bans canbe of major importance with respect to foot-and-
mouth disease outbreaks, as shown in this chapter. A further increase of trade between
countries calls for anaccurate and coordinated policy for contagious animal diseases.To
anticipate thesedemands,amodelling environment isdesired in which 'what-if' scenarios
can be performed to explore the epidemiological and economic effects of the various
diseases and control strategies.This requires input flexibility regarding (1) the type and
density of farming intheregion orcountry underconsideration, (2)thetype of disease, (3)
the prevention and control strategy to apply, (4) the extent and segmentation of export
markets, including intervention possibilities, (5)the country-specific probabilities of trade
restrictions,and(6)thevariouspricesanddemand/supplyelasticities.Acombined approach
across countries would makeit possible toexamine the impact of acoordinated strategy
within agroupoftradingpartners.Thesystemthusderived willbeaflexible tooltosupport
real-life policy-making in anincreasingly important area (Jalvingh etal, 1995).
References
Berentsen,P.B.M.,Dijkhuizen, A.A.& Oskam,A.J., 1990.Foot-and-mouth disease andexport.
WageningenEconomicStudiesnr. 20.Pudoc,Wageningen,89pp.
Hill,B.,1980.Anintroduction toeconomics forstudentsofagriculture.Pergamon Press,Oxford.

346pp.
Howe,K.S.&Mclnerney,J.P.(eds),1987. Diseaseinlivestock:economicsandpolicy.EUR11285
EN,CommissionoftheEuropeanCommunities,Brussels,190pp.
169
Chapter 12
Jalvingh,A.W.,Nielen,M.,Dijkhuizen, A.A.&Morris,R.S., 1995.Computerized decision support

system for contagious disease control. PigNews andInformation 16:9N-12N.
Just, R.,Hueth,D.&Schmitz,A., 1982.Applied welfare economics and economic policy. Prentice

Hall,Englewood Cliffs, 491 pp.
Oskam, A.J., 1988.Model building for thedairy sector ofthe European Community. PhD-Thesis,
University of Amsterdam, Amsterdam (in Dutch, English summary), 225pp.
170
13
Riskanalysis andthe international trade in animals and
their products
S.C. MacDiarmid
Ministry of Agriculture <S Fisheries, Wellington, New Zealand
Objectives
• risk analysis
• risk assessment
• risk management
• risk communication
The basic principles are illustrated with some examples, focusing on the importation of
animals and animalproducts.
13.1 Introduction
The incentives to develop astructured, objective, repeatable and transparent process of
risk analysis have followed important changes inthe social and political factors governing
worldtrade.Theconclusion oftheUruguay RoundoftheGeneralAgreementonTariffs and
Trade (GATT) has led to an international agreement to remove barriers to trade in
agricultural products, except in situations where such trade can be demonstrated to
jeopardizetheanimal,humanorplanthealthoftheimportingcountry.Thediscipline ofrisk
analysis is being developed togive decision makers the means to assess whether or not
particular trade proposals do,indeed,jeopardize the animal, human orplant health of the
importing country and todemonstrate tointerested parties thebasis on which approval to
import is granted or refused1.
While acknowledging theintuitive appeal of a 'zerorisk' policy toconservative sectors of
a nation's livestock industries,thepursuit of such a 'zerorisk' policy is counterproductive
globally and domestically (Kellar, 1993).There is only one 'zero risk' policy and that is
totalexclusion ofallimports.Evenatotalprohibition onimportation ofanimalsandanimal
products would not achieve 'zero risk' becausepeople still travel and, if legal avenues are
unavailable,people willfindwaystoimport illegally.
In an important introduction to the subject of risk analysis, Kellar (1993) counters the
In this chapter risk is approached from a veterinary perspective, while in the previous two chapters this
was done from an economic point of view (ie, decision making under risk). The two approaches differ in
their objectives, but can complement each other.
171
Chapter 13
unattainable 'zero risk' with the recently established GATTprinciples that quarantine
measures appliedinthenameofprotecting animalhealthshouldbebasedonsound science
and risk assessment methods and should notbe used asdisguised barriers totrade.He also
makes the point that risk analysis, like epidemiology, must deal with situations as they
ariseandtoleratethemathematical limitations oftheanimaldiseaseprevalenceestimatesor
other suchdata onwhich itisbased.
When analysing the risks associated with aproposed importation of animals or animal
products it mustbe remembered that suchimports cannot be madewithout some element
of risk. Thebenefits of the imports often accrue to arelatively small group of people only,
usually the entrepreneurs, initial importers and distributors of the new genetic material.
Therisks,ontheotherhand,arebornebyamuchbroadergroupwhichincludesalllivestock
ownerswhoseanimalscouldbeinfected withanexoticdisease,aswellasthegeneralpublic
who maybe expected tobear thecost of containing and eradicating an outbreak of exotic
disease.Forthesereasonsariskanalysismayincludeacost-benefit analysisoftheproposed
importation. However, importation may nevertheless bepermitted even in the absence of
anydemonstrable nationalbenefit. Forexample,theNewZealand MinistryofAgriculture's
policy is that every citizen has the right toimport unless the risk to agricultural security
precludesimportation.Suchapolicypresupposesthatthequarantine serviceischargedwith
makingjudgments about the risks,and therefore the costs which may be imposed on the
agricultural community,butdoesnotsitinjudgment onwhat arecommercial decisions.
13.2 Terminology
The terminology of risk analysis has notbeen standardized and this can lead to confusion.
Sofar, attemptstostandardizetermshavenotbeen successful. Recognizing this,thejournal
RiskAnalysisrequireseacharticletodefinekeytermsinthecontextofthat particulararticle.
TheAnimal andPlant Health Inspection Service (APHIS) oftheUnited States Department
of Agriculture has proposed astandardized nomenclature for animal health risk analysis
(Ahletal., 1993)and,withoneexception,thepresentdiscussion follows the nomenclature
proposed byAPHIS.
13.3 Analysis of risk

Risk, as it relates to the importation of animals or animal products, is ameasure of the
probability oftheintroduction ofanexoticdiseaseandtheseriousness of such anoutcome.
Risk analysis isablend of art and science and isconsidered tocomprise risk assessment,
riskmanagement andriskcommunication (Ahl etal.,1993).
However, in any risk analysis it is important that risk identification be carried out
adequately.Ifaparticularriskisnotidentified, then stepstoreduceitcannotbe formulated.
Many failures of quarantine are attributable to afailure of risk identification rather than
riskassessment orriskmanagement. Forthisreason,itcanbestated thatrisk identification
isof sufficient importance towarrantconsideration asasubdiscipline initsown right.
Inevaluating aproposal toimport animals or animal products thefirststep istodraw upa
comprehensive list of all the pathogens which could be associated with the species or
172
Risk analysis and the international trade in animals and their products
commodity underconsideration and then identify thepossible routes by which these could
come intocontact with susceptible animals inthe importing country.
Riskassessment istheprocessofestimating,asobjectively aspossible,theprobability that
an importation would result in the entry of an exotic disease agent and that local livestock
would be exposed to that agent. Risk assessment ought to examine the effect of the
introduction ofanexotic disease.However,veryfew studiesofthisnaturehavebeencarried
out anywhere.
Inriskstudiesitiscommontouse 'risk' synonymously withthelikelihood ofoccurrenceof
ahazardousevent.Insuchinstances,themagnitude oftheevent isassumed tobe significant
(Ahle/ ai, 1993).
Riskmanagementistheprocesstoidentify andimplement measureswhich canbeapplied
to reduce the risk to an acceptable level and document the final import decision. This
process isalsocalledrisk mitigation orhazard mitigation.
Risk communication is the process by which the results of risk assessment and risk
management are communicated to decision makers and the public. Adequate risk
communication is essential in explaining official policies to stakeholders, such as
established livestock industry groups,whooften perceive that they areexposed totherisks
but notthebenefits of importations. Risk communication must alsobe atwo-way process,
with stakeholders' concerns being heard byofficials and addressed adequately.
Having identified thepossible risksposed by aproposed importation, the next stage inrisk
analysis is an assessment of therisk entailed by an unrestricted importation of animals or
animal product underconsideration. Risk assessment takes into account the prevalence of
pathogens inthesource population, theprobability ofpathogens surviving inthe animal or
product during the process of importation, the probability of the pathogen coming into
contact with local livestock after importation and the seriousness of such contact.
There is a substantial body of information on the survival of pathogens in many animal
products and,theoretically,eachoftheotherfactors shouldbeamenabletobeing quantified
in a similar objective and scientific fashion. In reality, at the present time it is often not
possible to quantify them adequately. Much of the assessment ends up being based on
guesswork andisthuspotentially controversial and opentochallenge from either domestic
interest groups oroverseas trading partners.
Risk management, onthe otherhand, isusually able tobe quantified more objectively. For
instance,thereshouldbeverylittledebateoverthesensitivityofaparticular serologicaltest,
ortheefficacy ofaparticular embryowashing regimen for aspecific pathogen onembryos
of agiven species.
13.4 Managing risk

Consider, forexample,aserological testhavingasensitivityof0.95whenappliedtoanimals
infected with a particular disease agent. The probability of missing a single infected
individual is0.05.However, thepredictive value of adiagnostic testisalsoafunction ofthe
prevalence of infection inthepopulation under test.Theprobability that an animal whichis
negativetoagiventestisactuallyinfected iscalculated asfollows (Marchevsky etal, 1989);
173
Chapter 13
p(l-s)
P(I I N)
p(l-s) +(l-p)e
where
P(I IN) =theprobability oftheeventofananimalbeinginfected giventhat
itistest-negative;
p =thetrueprevalence;
e =the specificity ofthetest;and
s =thetest sensitivity.
In matters of quarantine, the exclusion of 'false positive' animals is seldom of major

concern, sothisdiscussion assumesthatspecificity, e= 1.Withatestofsensitivity,s=0.95,
the probability of a given test-negative animal actually being infected varies with
prevalence,p,asillustrated inTable 13.1.Itcanbe seenthat astheprevalence of infection
in the source population increases, the probability of agiven test-negative animal being
infected alsoincreases.
Table 13.1Probability that atest-negative animal isactually infected, given atest sensitivity of
0.95 and specificity of 1
Prevalence Probability (UN)
0.01 5.05 x 10"4

0.05 2.62 x 10"3
0.1 5.52 x l O ' 3
0.2 1.23 x 10-2
Similarly, at any given prevalence, the probability of including atest-negative infected

animal inanimportation increaseswiththenumberof animalsinthegrouptobeimported.
The probability of including even one test-negative infected animal (c) in agroup ofn
animalscanbe calculated thus (Marchevsky etal.,1989):
ƒ Ü=B)Ê \n
P(c>llN) = l - \ (l-p)e+p(l-s) ƒ
The effect of increasing the size of the group destined for import is illustrated in Table
13.2.
With somediseases apolicy decisionmaybemadethat apositivetestresult will disqualify

onlytheindividual animalwhichreactedpositivelytothetest.Therisksonetakeswithsuch
apolicy are illustrated intheexamplesjust discussed (Tables 13.1and 13.2).
174
Riskanalysisandthe international trade inanimalsandtheir products
Table 13.2Probability that atest-negative infected animal will be included in agroup destined
for import (prevalence =0.01,sensitivity =0.95,specificity = 1,entire group tested)
If reactor animal If asingle reactor
only excluded disqualifies group
n P(c>1IN) P of notest positives
100 4.92 x 10"2 5.00 x 10"2

200 9.61xlO" 2 2.50x l O ' 3
300 1.41 x 10"1 1.25 x 10"4
400 1.83 xlO" 1 6.25 x l O ' 6
500 2.23xlO" 1 3.13 x l O ' 7
However, with some other diseases (often OIEList Adiseases), it may be decided that a
positive test result in any one animal will disqualify the entire group intended for
importation. In such cases theprobability of disqualifying an infected group increases as
prevalence and/orthe sizeof thegroup increases.Theprobability of agiven test failing to
detect at leastonetest-positive animal inaninfected group,thusidentifying thegroup as
infected, canbecalculated thus(MacDiarmid, 1987):
ß=[l-ts/n]P n
where tisthenumber of animals from thegroup which aretested.

Thedifference inriskbetweenthetwopoliciesisillustratedinTable 13.2.Itcanbeseenthat
where the presence of a single reactor animal disqualifies the entire group destined for
export, rather than just the reactor animal itself, the risks of an infected animal being
imported aresignificantly reduced.
Whether apositive result to any one test disqualifies only the affected individual or the
whole importation, the risks of importing unwanted disease can be further reduced by
imposing aseries of safeguards. When aseries of safeguards is applied to an importation
it may be relatively easy to quantify the amount by which the risk is reduced, even if
consensus onthemagnitude oftheinitial,unrestrictedriskcannot be attained.
At this point it is appropriate to look at some examples of risk analysis. Many other
examples canbe found inAcree &Ahl(1991)and Morley (1993).
13.5 Examples
13.5.1 The risk of introducing anthrax by importing green hides

Inreviewingtheconditionsgoverningtheimportation ofhides andskinsintoNewZealand,
Harkness (1991)outlined an approach to assessing therisk of introducing anthrax through
the importation of green hides from Australia. The method used was based on one
developedinAustraliatoassesstheriskofintroducingtransmissiblegastroenteritisofswine
inpigmeat, and which hasbeendescribed elsewhere (MacDiarmid, 1991).
175
Chapter 13
The annual probability (T) of anthrax introduction viathe medium of unprocessed hidesis
related to the probability (p) that a hide contains anthrax spores and to the number of
occasions(n)thatsusceptible animalsareexposed tocontactwiththose spores.Thenumber
ofoccasionsthatcontactwithsporescausesinfection follows abinomial distribution, sothat
thechanceof introduction of infection is:
T=l-(l-p)n
But when T is small, (eg, less than 0.001) the expression above approximates to the
following:
T =pn
which simplifies the interpretation of the estimate of T and is the basis of the present
estimates.
Toassess theprobability of anthrax spores being present, the following assumption is also
made:
p=ise
where
i =theprobability thatanAustralian animalwasinfected withanthraxatthetime
of slaughter. (The average number of officially confirmed cases of anthrax
during the period 1970-1981 was 19 per year [range 9-42] and, without
reference to the continuing decline in case numbers over many years, the
maximum expected incidence was calculated at 40 cases per year. Total
slaughterings of sheep and cattle in Australia in 1989/90 were about 40.23
million,afigurestablesince 1980/81[range37.2-42.3million]. Thevalueof
iwastherefore estimated at40/40.23million=0.000000994 or9.94x 10"7.)
s =theproportion of spore infectivity surviving pre-export handling. (Since the
spores of the anthrax bacillus are extremely resistant to adverse
environmental conditions survival rates are considered to be very high,s
wasestimated at90%(range 75%-95%);s=0.9.)
e=the proportion of green Australian hides among all rawstock processed in
New Zealand. (Approximately 38.4million sheep and 3.1 million cattle are
slaughtered in New Zealand annually, an estimated 31% of New Zealand
produced hides and skins are processed in the country, amounting to 13.5
million pieces annually.Theestimated annual import volume from Australia
for green skins is 0.92 million [range 0.90 - 1.40 million]. Thus e was
estimated at0.92m / 13.5m= 0.068.)
176
Riskanalysis andthe international trade inanimals andtheir products
Thuspwas estimated as0.068 x0.9 x0.000000994 =0.000000061 or 6.1 x 10"8

Thenumberofoccasions peryearonwhich susceptible animals arelikely tobe exposed to
contact with anthrax spores wascalculated as follows:
n=gtvf
where
g=the number of Approved Tanneries inNew Zealand, (g =23; Ministry of
Agriculture andFisheries records.)
t=theproportion of Approved Tanneriesoperating with arisk of contaminating
pastureland bywastewaterduringflood periods.(Nosatisfactory information
was available at the time the assessment was made. Waste drainage is
controlled by local authorities under the appropriate legislation. Estimated
proportion presenting riskwas 10-20%sotwasassumed = 0.2.)
v=the average number of days per year on which flooding occurs on pasture
downstream of tanneries. (Estimated range was 20-30 days per annum, so
v=25.)
f=the probability of processing contaminated material during flood periods.
(Calculated as average number of days offloodingdivided by days worked,
around 25/235.Therefore f=0.11.)
Thus nwasestimated as23x0.2 x25x0.11=12.65.
The calculations therefore indicate that the probability of introducing anthrax in any one
yearis:
T=0.000000061 x 12.65=0.000000772 or7.72 x 10"7

(ie,less than onein amillion)
The risk is likely to be even lower when one considers that the probability of livestock
encountering theanthrax organism onanycontaminated pastureislessthan 1 and thatante-
andpost-mortem inspection atAustralian abattoirs ishighly effective inpreventing anthrax
casesbeingprocessed for theirhides.
A risk assessment method must include some estimation of the degree and source of
uncertainty associated with predicting thelikelihood of introducing an animal disease as
otherwise decision makers tend to focus on one singlepossible outcome, possibly at their
peril.The weakness of adeterministic model such asthe onejust described is that it does
not give thedecision maker anyestimateoftheuncertainty of theriskestimate.As mostof
thevariablesareonlyestimatesofwhatismostlikely,the 'real'riskestimatewillbeshrouded
in uncertainty. A Monte Carlo or Latin hypercube simulation model, using a personal
computer software program such as @RISK (see also Chapter 18), allows each of the
variablestoberepresented asarangeofvaluesandthen,byaseriesofiterativecalculations,
177
Chapter 13
presentsthefinalriskestimateasaprobability distribution.Addressing uncertainty isoneof

themost valuablecontributions modern riskanalysisbrings tothefieldofquarantine.
13.5.2 OIE list A diseases and embryo transfers

Thedevelopment of embryotransfer techniques,whereby embryosmayberecovered from
donors in one country, frozen and transported internationally before being implanted into
recipients in another country, hasopened the way for the relatively low risk introduction
of new bloodlines. The importation of genetic material by embryo transfer carries
considerably less risk of introducing exotic diseases than does the importation of live
animals or semen. However, while there is available evidence indicating that many
pathogens are unlikely to be transmitted along with embryo transfers, caution must be
exercisedbecauseinmanycasesthenumberofexperimentshasbeensosmallthattheupper
limit of a95%confidence interval for theprobability of disease transmission is still rather
high.
To be 95% confident that transmission does not occur between viraemic donor and
susceptible recipient in, say, more than onetransfer in 100,transfers would need to be
carried out with negative results on 300 occasions. Such large-scale experiments are
expensive andhavebeenconductedforarelatively smallnumberofpathogensonly.Forthis
reason many countries operate aquarantine policy of excluding an entire importation if
any individual within itisfound tobepositiveinatest for oneof the OIEList Adiseases.
Bytaking intoaccount factors such assensitivity ofthe diagnostic test ontheherd or flock
of origin and on embryo-derived progeny, and the probability of the disease being
transferred along with the embryo, an estimation can be made of the risk of allowing an
infected buttest-negative embryo-derived importtoleave aquarantine program.
Estimates oftheprobability ofaparticulardiseasenotbeingtransmittedbyembryo transfer
may be made by examination of the literature to determine the number of experimental
transfers whichhavebeen made from infected donorstosusceptible recipient animalswith
confidence limitsthen being determined from scientific tables.
The equation ß= [1-ts/n]Pn, mentioned earlier, which is based on the hypergeometric
distribution modified totake intoaccount test sensitivity, canberearranged (MacDiarmid,
1987)tocalculate theminimum prevalence oftrue infection, p,which mustbepresent ina
herdfor agiventesttoidentify atleastonetest-positive animalwithanominated confidence
level equal to (l-ß m ):
p=logß m /nlog(l -ts/n)
Inotherwords,ifthetestprocedure detectsnotest-positive animals inasample sizet from

a herd/flock of size n, then at confidence level (l-ß m ), we can say that the herd/flock is
free of infection orhasaprevalence lessthanp(MacDiarmid, 1987).
Table 13.3shows how one may calculate therisk of aparticular List Adisease entering a
country through an importation based on an embryo transfer program and apolicy of a
single test-positive disqualifying the entire shipment. Values for size of herd/flock, test
178
Riskanalysisandthe international trade inanimalsandtheir products
sensitivity, number of donors, average number of offspring/donor and probability of

transmitting diseasebyembryotransfer areallhypothetical inthis example.
InapplyingthemodelinpracticethevariablesshowninTable13.3areincorporatedintoaLatin
hypercubesimulationmodelasdistributionsofvalues,usingthePCsoftwareprogram @RISK.
13.5.3 The risk of introducing rabies through t h e importation of dogs

There has never been acase of rabies recorded in New Zealand. Isolation and stringent
quarantine policies have kept the disease from being introduced. Current import
requirements restrict entry ofdogstothoseresidentinavery few rabies-free countries.
Table 13.3Riskof a diseasebeing introduced by an embryo transfer program with apolicy of

asingle test-positive disqualifying the entire shipment
Assumptions: negative test on herd/flock of origin; embryos imported; offspring
quarantined; recipients slaughtered; singlecase disqualifies entire import
Sizeofherd/flock oforigin,N 300
Numbertested,t 300
Sensitivity of test inherd/fiock,s 0.9
Nominatedconfidence level 0.95
Therefore ßis 0.05
Maximumprevalencetoescapedetection,p=logß/Nlog(l-ts/N) 0.0043
Number ofdonors,n 50
Averagenumber ofoffspring/donor,m 4
Probability of transmitting diseasebyET 0.01
Sensitivity of test onprogeny 0.9
Proportion of donorsthat areinfected, pD 0.0043

Proportion ofdonorsthat arenotinfected, qD 0.9957
Prop, ofprogeny from infected donorsthat areinfected.pE 0.01
Prop, ofprogeny from infected donors that arenotinfected,qE 0.99
Proportion ofinfected progeny whichtest positive,pC 0.90
Proportion of infected progenywhich test negative,qC 0.10
Prob.(0infected amongprogeny) = {qD+pD[qE]m}n 0.9915
Prob.(l ormoreinfected amongprog.)= l-{qD+pD[qE]m}n 0.0085
Prob.(0reactors amongprogeny) = {qD+pD[qE+pE(qC)]m}n 0.9923

Prob.(l ormorereactors)= l-{qD+pD[qE+pE(qC)]m}n 0.0077
Prob.(0infected intest-negative group)=
({qD+pD[qE]m}/{qD+pD[qE+pEqC]m}) n 0.9992
Prob.(l ormoreinfected intestnegativegroup)=
l-({qD+pD[qE]m}/{qD+pD[qE+pEqC1m})n 0.0008
179
Chapter 13
However, with abetter understanding of the epidemiology of rabies and the efficacy of
vaccination, are-examination of importpolicies wasconducted in 1994.Aspart of that an
assessment was made of the risk of releasing arabid dog from quarantine under each ofa
numberofimportpoliciesbased onquarantineperiodsofdifferent duration,withorwithout
verified vaccination status.
The PCprogram ©RISK was used toconstruct aLatin hypercube risk assessment model.
Theunrestricted risk (R)of selecting arabies-infected animal,without any safeguard being
inplace,wasestimated as:
R = (ixd)/365
where
i = incidence;and
d = incubationperiod indays.
Atriangular distribution was used to estimate d. From an examination of the literature

values selected for dwere:minimum 10,mostlikely 56and maximum 365days.
An estimate of the range of incidences of rabies in dogs in a number of countries was
calculatedbydividingthepopulationofdogsinthecountrybythenumberofcasesofrabies
peryear(Table 13.4).
Table 13.4Cases of rabies per year, reported and projected incidence, and the probability
that a randomly selected animal will be infected with rabies
Country or city/total Reported Most likely Maximum Riskof selecting
number of dogs cases number ofcases number ofcases aninfected animal
(minimum) (reportedx 1.5) (reported x5.0) per million"
USA
(54.6m dogs) 91a 137 455 1.6
Canada
(5m dogs) 100 150 500 20
France
(9.8m dogs) 38 57 190 3.8
Germany
(5m dogs) 192 288 960 38
Philippines
(6m dogs) 525 788 2625 86
Lima
(0.42m dogs) 3b 1260c 4200 1700
a
These are therabies cases in pet dogs, ie, 84%of the reported canine rabies cases
b
The number of cases fell to this following a vaccination program
c
The number of cases the year before the vaccination program
Mean risk of selecting an infected animal ismean incidence xmean incubation in days/days in the year
180
Riskanalysis andthe international trade inanimalsandtheir products
Asitisprobablethatthereportednumberofcasesreportedunderestimatestherealincidence
of the disease, an attempt was made to address this by creating arange of incidences. For
example, the number of cases of rabies in dogs in the United States in 1988 was 91.
In therisk assessment we considered that the 'most likely' number of cases was actually
50% higher than this (137) and had the occurrence of rabies in dogs been grossly
underreported, we considered that the actual number could havebeen five times greater
(455).Thesevalueswereusedtodescribe atriangulardistribution usedinthemodel.Table
13.4 shows the mean unrestricted risk of selecting an infected dog. In practice, the
simulation model estimated adistribution ofvalues for thisrisk.
Once the magnitude of the unrestricted risk of introducing arabies-infected dog has been
estimated, the effects of vaccination and quarantine were assessed, again using arange of
values (Table 13.5) in a simulation model. The effect of each safeguard is the product of
theunrestricted risk andtheestimate of failure of the safeguard.
Table 13.5Probability that safeguards will fail to prevent the introduction of rabies
Minimum Most likely Maximum
estimate estimate estimate
of risk of risk of risk
Safeguard - vaccination.
Probability that vaccination will
not protect the dog. 0.01 0.06 0.20
Safeguard -quarantine.
Probability that 1 monthof
quarantine will not detecta
dog incubating rabies. 0.47 0.50 0.55
Probability that 4months

of quarantine willnot
detect adog incubating
rabies. 0.22 0.25 0.28
Probability that 6months

of quarantine willnot
detect adog incubating
rabies. 0.09 0.11 0.13
The simulation model wasrun for 5000 iterations.Table 13.6showstheestimated risksof

introducing from the United States adog incubating rabies following the application of
different risk reduction strategies. In 95%of iterations therisk estimate was less than that
shown in Table 13.6.The model also generated risk estimates for imports from the other
countries listed inTable 13.6,butthese will notbe reproduced inthepresent discussion.
181
Chapter 13
On the basis of the results of the simulation model it wasconcluded that vaccinated dogs
imported without prolonged quarantine pose no greater risk of introducing rabies than
dogsenteringthrough a6-month quarantine.
Table 13.6Estimated risks of introducing from the United States a dog incubating rabies,
expressedasthe number of dogs per 1 million. Ninety-five percent of the iterations
of the @RISKsimulation model produced estimates equal to or lessthan the value
shown.
Safeguards Risk
1month quarantine 1.92

4 monthsquarantine 0.95
6 monthsquarantine 0.42
Vaccinated 0.39
Vaccinated and 1 month quarantine 0.20
Vaccinated and4months quarantine 0.097
Vaccinated and 6monthsquarantine 0.042
13.5.4 The risk of introducing fish diseases in salmon flesh

Access to New Zealand markets for products derived from wild, ocean-caught Pacific
salmonfrom Canadahasbeenopposedbylocalsalmonfarmers andrecreationalfisherswho
haveexpressed seriousconcerns about thediseaserisks posedby such importations. These
concernsledtheNewZealandMinistry ofAgriculture andFisheriestocarryoutan analysis
oftherisksofintroducingexoticfishdiseasesthrough importationsofheadless,eviscerated,
wild, ocean-caught Pacific salmon from Canada (MacDiarmid, 1994).This risk analysis
concludedthatnoneofthe23diseasesofsalmonidspresentinNorthAmerica islikelytobe
introduced intoNewZealand should imports bepermitted.
For tablefishtoserve asavehiclefor theintroduction offish disease, anumber of criteria
mustbe met:
• the disease mustbepresent in thewatersof origin;
• the disease mustbe present in theparticular fish caught (orthe flesh must have become
contaminated duringprocessing);
• the pathogen must bepresent intheimported tissues;
• the diseasedfleshmustpassinspection andgradingprocedures;
• thepathogen inthefleshmustsurvivestorageandprocessingandbepresent atan infectious
dose;
• thepathogen mustbeabletoestablishinfection bytheoralrouteorbythehostbeingbathed
in it;and
• scraps of thefleshproduct mustfindtheir way intoasusceptiblefishhost in New Zealand
or aninfectious doseofpathogen mustfinditswayintocontact with asusceptiblefishhost
by some othermeans.
182
Risk analysis and the international trade in animals and their products
Takingthesefactorsintoconsideration, anon-quantitative riskanalysisledtotheconclusion

that of all the exotic diseases present in North American salmonids, furunculosis, caused
by thebacteriumAeromonassalmonicida,isthe disease which wouldbe most likely tobe
carried inthe type ofcommodity under consideration.
A quantitative risk assessment took into account what is known of the prevalence of
A. salmonicida in wild, ocean-caught Pacific salmon, the distribution and numbers of
A. salmonicidafound ininfected Pacific salmon,theeffect of processing onthe numberof
A. salmonicida in the tissues of infected fish, the survival of A. salmonicida in the
environment,thedoseofA.salmonicidarequired toinfect susceptible fish (of anyspecies),
andwaste management practices inNew Zealand.
The risk assessment concluded that the risk of introducing A. salmonicida into New
Zealand's farmed, recreational or native fish stocks is extremely remote. For chilled,
headless,eviscerated salmon themodelestimated thatthere isa95% probability thatthere
wouldbefewer than 1 diseaseintroductionsper 10milliontonnesimported.Toputthisinto
perspective,theanalysispointedoutthattheentireannualproductionofwild,ocean-caught
Pacific salmon inBritishColumbia isnomorethan 100000tonnes.
The analysis recognized that the risks associated with other diseases would be cumulative
totherisksposedbyA. salmonicida andthatanyriskposedbyanyoneoftheotherdiseases
mustbeaddedtothatposedbyfurunculosis. However,theanalysisalsooutlinedreasons for
considering that no disease ismore likely tobe introduced thanA. salmonicida and that
thecumulative risk of disease introduction isunlikely tobe significantly greater than the
range of riskestimates described for A. salmonicida.
Therisk analysisconcluded that theoverall risk ofintroducing diseases of salmon through
the vehicle of headless, eviscerated, wild, ocean-caught Pacific salmon, appropriately
certified bythe Canadian government authorities astoorigin andgrade,is negligible and
poses no threat to either New Zealand's wild and farmed salmonid stocks or to non-
salmonidfishstocks.

Even insituations where theriskfrom unrestricted entry canbequantified objectively, and
little controversy surrounds the calculation of the extent to which safeguards reduce that
risk, it may be difficult to attain agreement on what constitutes an acceptable risk. In
discussing opposition toproposed changes toBritain's policy of prolonged quarantine of
dogs imported from Europe,Wilson (1994)pointed outthat therisk of any individual dog
importedunderthenewpolicyincubatingrabiesisabout 1 in 15 000000.Hecomparedthis
tothe 1 in 10000probabilitythatalargeasteroid orcometwillcollidewiththeEarthduring
thenext century.
Risk isproportional tothevolume of imports.Theeffect that sizeof an importation hason
riskhasbeenmentioned already.Itcanbeseenthatwhereapolicyofexcludingonlyreactor
animals ispractised, risk increases aseither size of ashipment increases orthe numberof
shipments increases.
On the other hand, while apolicy of excluding an entire shipment on the basis of even a
183
Chapter 13
single reactor results inareduced risk with larger shipments, an importer couldprotect his
or her investment by splitting alarge importation into several smaller ones. While this
would reducethe importer'sfinancialrisk itwould increase theimporting country's riskof
exposuretoexotic disease.
The discipline of quantitative risk analysis, as it applies to theimportation of animals and
animal products, is still in its infancy and maybe regarded with grave suspicion by some
stakeholders. For example, one editorial referred torisk analysis asa fad "...related more
closelytodeveloping abureaucratic excusethatfew outsiderscanfathom thantointelligent
decision-making" (Anderson, 1994).Suchconcernscanonlybe allayedbypractitioners of
the discipline striving to harmonize approaches to risk analysis and to standardize
terminology.
While this discussion has concentrated on quantitative risk analysis, non-quantitative
methods should not be forgotten. Until recently quarantine authorities tended to base
decisionsalmostsolelyonnon-quantitative riskanalyses,andthesestillhaveavaluablerole
to play in the routine administration of imports, especially of animal products. Non-
quantitative risk analyses canbe objective, repeatable and transparent and alwaystake less
time, and thus arelessexpensive,than quantitative analyses.Nevertheless, with increasing
frequency quarantine authorities arehaving todeal with import proposals which require a
quantitative approach.While it hasbeen possible inthepast for regulators toavoid riskby
refusing access, in the post-GATT environment this option is less acceptable and so
quarantine authorities aroundtheworldarebeginningtoadoptthedisciplineofquantitative
risk analysis.
Acknowledgements
EquationsusedinTable 13.3tocalculatetheprobability oftherebeingoneormore infected
animals in a clinically normal group were provided by Mr Rob Cannon, Bureau of
Resources Science,Canberra,Australia andMrVictorBealJnr,USDA-APHIS,Hyattsville,
Maryland. Dr Kevin Corrin of the New Zealand Ministry of Agriculture and Fisheries
carried outtherabiesrisk analysis described inthischapter.
References
Acree,J.A.&Ahl,A.S.(eds), 1991.Proceedings oftheinternational seminaronanimal import
riskanalysis.August 11, 1991,CarltonUniversity,Ottawa,Canada.UnitedStatesDepartmentof
Agriculture,Animal& PlantHealthInspectionService,Hyattsville,Maryland,64 pp.
Ahl, A.S.,Acree, J.A., Gipson, P.S.,McDowell, R.M., Miller, L. &McElvaine, M.D., 1993.
Standardizationofnomenclatureforanimalhealthriskanalysis.RevueScientifiqueetTechniquede
l'Office International desEpizooties 12: 1045-1053.
Anderson,D.L., 1994.Mother's gooseberry bushes.LiveAnimal Trade& Transport Magazine

VI(4): 2-3.
184
Riskanalysisandthe international trade inanimals andtheir products
Harkness,J., 1991.Review ofconditions applied totheimport ofhidesandskinsintoNew Zealand.

NASS Publication 91-3.Ministry of Agriculture andFisheries, Wellington.
Kellar, J.A., 1993.The application of risk analysis to international trade in animals and animal
products.Revue Scientifique etTechnique del'Office International desEpizooties 12: 1023-1044.
MacDiarmid, S.C., 1987.Atheoretical basisfor theuse of askin test for brucellosis surveillance in
extensively-managed cattle herds. Revue Scientifique et Technique de l'Office International des
Epizooties 6: 1029-1035.
MacDiarmid, S.C., 1991.The importation into New Zealand of meat and meat products. A review
of the risks to animal health. NASS Publication 91-2. Ministry of Agriculture and Fisheries,
Wellington: 168-170.
MacDiarmid, S.C., 1994.The risk of introducing exotic diseases of fish intoNew Zealand through
the importation ofocean-caughtPacific salmonfrom Canada.Ministry ofAgriculture andFisheries,
Wellington, 161pp.
Marchevsky, N.,Held,J.R.&Garcia-Carrillo,C , 1989.Probability of introducing diseases because

of false negative test results.American Journal ofEpidemiology 130: 611-614.
Morley, R.S. (coordinator), 1993.Risk analysis, animal health and trade. Revue Scientifique et
Techniquedel'Office International desEpizooties 12. Office International desEpizooties,Paris,434
pp.
Wilson, A.J., 1994.Rabiespolicy. [Correspondence].Veterinary Record 135: 95-95.
185
14
Examples of integrated information systems for decision
making at farm and national level
R.S. Morris 1 ), W.E. Marsh 2 ), R.L Sanson1) &J.S. McKenzie 1 )

1)Department of Veterinary Clinical Sciences, Massey University, Palmerston North, New
Zealand
2) Department of Clinical and Population Sciences, College of Veterinary Medicine, University
of Minnesota, StPaul, MN, USA
Objectives
• thestate-of-the-art withrespectto computerized decision support systemsin animal health
management
Variousexamples aredescribed andillustrated atboth farm and national level.
14.1 Introduction
Computers are valuable tools for epidemiological investigation and for management of
animal health services atboth farm and national level.The nature of information systems
is continuing to evolve rapidly as the mobility and capacity of the computer hardware
becomes greater and greater, and asnew forms of software become readily accessible.
Earlier concepts of the objectives of information management were embodied in names
such as 'databank' and 'registry'. The analysis of datawas handled quite separately from
entry and storage,frequently notevenonthe samecomputer.
Sincethentheconceptual framework for information managementhasmatured (Thrusfield,
1983; 1986),and the capability to handle more powerful and especially more integrated
information management systems has grown and changed in the light of experience.
Currently, information management efforts aredirected towards 'decision support'. The
twokeyconceptsinthisapproacharethatthefocus isonthedecisionmakers(atbothpolicy
and implementation levels) rather than on the system itself, and that asfar aspossible the
components of the decision support system are seamlessly integrated so that a single
interface isusedtoaccess allfeatures ofthe system without regard towhichcomponent of
thesystem isactually providing theanswers.
In this chapter this trend is illustrated with examples from national disease control and
from health management systems atfarm level.EpiMAN is adecision support system for
control of major diseases which require national control or eradication procedures.
The first implementation of the approach hasbeen for exotic diseasecontrol.The system
incorporates acoredatabasewithlinkstoageographic information system(GIS),sothatall
187
Chapter 14
information about livestock herds and disease occurrence can be linked directly back to
the farm location. Expert systems process incoming data immediately and guide outbreak
managers on priorities for allocating personnel. Other components of theexpert system
answer technical questions on demand. Simulation models incorporated into the system
predict both the short-term consequences of individual outbreaks as sources of infection,
and the longer-term merits of alternative control policies which might be under
consideration. An 'epidemiologist's workbench' gives the epidemiologist access to both
standardmenu-selected reportsondemandandthecapacitytoformulate advanced analyses
using built-in software. The system is totally mobile, and can be set up anywhere in the
country. The approach embodied inEpiMAN is progressively being extended to endemic
disease control programs, other exotic diseases and quality assurance procedures such as
chemicalresiduecontrol.ThenatureofEpiMANmakesitideally suited foruseasatraining
tool, aswell asan operational tool.
A similar approach is being adopted at farm level. PigCHAMP was developed at the
University of Minnesota as a records analysis program for pig herds, and is now being
expanded to incorporate farm financial data, abattoir information, expert systems and
simulation models. Modules originating at different research centres can be incorporated
into the total system, and the user can choose which components to pay for and use,
accordingtoneed.DairyMAN isanequivalent systemfor dairyherdsdeveloped atMassey
University, which isbeing enhanced with awhole farm simulation model and with expert
systems.Itisalsointegrated with thenational dairyherdimprovement system.
These examples areusedtoillustrate thenatureandvalue of decision support systems.
14.2 Decision support systems

Decision support systems (DSS)areinteractivecomputer-based systemsthat help decision
makersutilizedataandmodelstosolveunstructuredproblems (Sprague &Carlson, 1982).
They exhibit thefollowing characteristics:
• they tendtobeaimedatlesswell-structured,underspecified problems;
• they combine the use of models and analytic techniques with traditional data access and
retrieval functions;
• they typically focus on features that make themeasy tousebynon-computer people inan
interactivemode;and
• theyemphasizeflexibilityandadaptabilitytoaccommodatechangesintheenvironment and
decision-making approach oftheuser.
The purpose of aDSS istoprovide aset oftoolstohelpintheinterpretation of data. The

DSS should give decision makers an appreciation of the risks implicit in particular
decisions, and the factors which can bevaried tomodify thoserisks.One approach is to
use an expert system with a database management system. Individual decision support
systemscancomprisepartofanoverallnationalanimalhealthinformation system(Morris,
1991).
Anidealapplication areaforDSSinanimalhealthisinemergencyresponsesystems,where
188
Examples of integrated information systems for decision making at farm and national level
typically decision makers have tocope with large volumes of diverse and often imperfect
data,inadequatetimeandresourcesareavailabletodevotetocomplexproblemsolving, and
the outcomes of decisions can have far-reaching consequences. Berke & Stubbs (1989)
present athoroughargumentinfavour ofDSSforhurricanemitigationplanning. Successful
control anderadication of aFoot-and-Mouth Disease (FMD)epidemic iscontingent onthe
rapid identification and elimination of all virus sources.This involves an understanding of
the dynamics of the disease, combined with adequate procedures that identify, record and
deal with all events that may contribute to further spread of the disease. The EpiMAN
project was initiated to develop a DSS to be used by the Ministry of Agriculture and
Fisheries (MAF) should anFMDoutbreak everoccur inNew Zealand.
14.3 Descriptionof EpiMAN

EpiMAN isa system for national control of major animal diseases, initially concentrating
on FMD.Itwas developed inNew Zealand aspart of national preparedness for any future
outbreak of this major exotic disease, but is now under consideration for adoption in a
number of othercountries.The systemruns onapair of linked Sunworkstations (database
server andgraphicsworkstation),towhichpersonal computers arenetworked. Replaceable
hard diskcartridges areused toallowrapid switching to different diseases and areas.Fast
printing ofcolour maps and of reports isprovided. The whole system isdesigned for easy
andrapid transportby airorland, andimmediate service attheoperational site.
Akey function of the DSS ismanagement of the large volume of datatypically generated
duringanemergency.Acomputerized databasemanagement systemisideally suitedtosuch
a task. The need to have a 'bird's eye view' of the situation, the need for presentation of
status reports in formats that are easy to comprehend, and the need to understand the
dynamicsofthediseaseinaspatialcontextledtotheevaluation andsubsequent adoptionof
a geographic information system (GIS) in EpiMAN. It is noteworthy that an analysis of
FMD outbreaks inunvaccinated populations inEurope from 1965to 1982(Lorenz, 1986)
showed that although the median outbreak size was 29 farms, the mean size was 1048,
because30%oftheoutbreaksweremassive.Animportantobjective ofEpiMANistomake
massiveoutbreaks muchlesslikely.
Computer simulation models areprograms which seek torepresent the dynamics of real-
world systems.Modelscanbelinkedtoinformation systemstoprovideprocedures for the
evaluation of management options based on an analysis of the current situation (Marsh,
1986;Jalvingh, 1993).In this manner, theinformation collection system serves to provide
parameter estimates for the model. These estimates are updated as new information is
acquired, andthe modelcanbere-runtoassessthenew situation.
NewZealandhasneverhadanoutbreakofFMDandhence,thereareveryfew veterinarians
inthecountrywiththeexperience orknowledgetofully understand theepidemiology ofthe
disease.AnFMDepidemic wouldplaceaseveredemand onqualified manpower resources
to run all facets of the Emergency Headquarters procedures. Expert systems, which can
emulate aspects of human reasoning, have an obvious role to play in interpreting
epidemic data and aiding inthedecision-making process.
189
Chapter 14
Figure 14.1showsthestructure MAPS

of EpiMAN. The core of the AGRIBASE
system is a comprehensive EPIDEMIC DATA
database, consisting of spatial ACTIVITY FORMS
data, textual data and

epidemiological knowledge of
FMD (contained within the
FMD models and expert
systems).Theepidemic-related SPATIAL TEXTUAL KNOWLEDGE
tabular data and farm profile FMD MODELS
^ ' .^^
information associated with
farms in the infected area is —m EXPERT SYSTEMS
stored in the database

• ^ .
/^/'::L 2J^*
management system. ^ ^ "
EPIDEMIOLOGICAL
Associated with this are the PARAMETERS
digital maps of the infected

area which are stored and
managed by the GIS. The STATISTICAL ANALYSIS
modelsof FMDspreadandthe SIMULATION
expertsystemsoperateonthese EPIDEMIOLOGISTS
WORKBENCH
spatial and textual datasets,
using a set of epidemiological STATUS MAPS V
STATISTICAL REPORTS
parameters which describe DECISION SUPPORT
aspects of the behaviour of

FMD. Initially these variables Figure14.1 ThestructureofEpiMAN
haveasetofdefault values,but
are modified through immediate statistical analyses ofthespatial and temporal patterns of
the particularepidemic.Details ofthesevariouscomponents arediscussed below.
14.3.1 Core textual database

The database is capable of containing information on all livestock units in the outbreak
zones.This ishowever notessential for the operation of the system, which can work with
muchsimplerdatasuchasgridlocationsofaffected andat-riskfarms,butextendsthepower
ofthe systemtoenablethe assessment ofriskfactors andtheprediction of disease spread.
Tofacilitate this,consideration isbeing given tocreation of anational agricultural index
system (Agribase) that will contain basic farm profile information on every commercial
farm in the country. Each farm will have a unique farm identification number, being the
key field throughout theEpiMAN system, and providing thelinkbetween the GIS and the
database management system.
Therecentdevelopment oflow-costhand-held geopositionersintendedfornavigation offers
another attractively simpleway ofdealing withlocation information. Theseallow the user
tostand atanoutbreak siteand instantlydeterminetheexactlocationbysatellite telemetry
190
Examplesof integrated information systemsfor decision making atfarm and national level
(at nocost). This information can then be fed into the database where it is immediately
linkedtoitsmaplocation,removingtheneedforlocatingfarms onpapermapstoentertheir
geographical locations.
14.3.2 Spatial database

EpiMAN employs the Arc/Info1 GIS operating on aUNIX workstation to manage the
spatial aspects of the system. Arange of graphical and other reports can beprovided from
the GIS.Variousoverview mapscanbegenerated, showing thelocation of all infected and
at-risk properties -some suitable for useby the Chief Veterinary Officer and the media,
othersintendedforuseintheEmergencyHeadquarters forassignmentofduties.Localmaps
can alsobeproduced asaresult of theriskevaluation by theexpert system, showing farms
tobevisited plus surroundingproperties.
Although the useof individual propertyboundary information gives the system maximum
power to support decision making, various less detailed methods can be used to come
closetothis level of detail.The nature of theGISmeansthat provided each map coverage
is 'registered' through areference point, maps of different types can be overlaid on each
other for visual or analytical assessment. For example, a standard paper map can be
optically scanned and presented on the screen with outbreak and other data visually
superimposed onitsothatdiseasedatacanberelated togeographical features in a familiar
way.Thusadvanceddigitalmapdataarenotessential.Wheredigitalmapdataareavailable,
thesecan beused torecreate a3-dimensionalimage of theland surface in the area, again
allowing thesedatatobedisplayed inrelation tooutbreak information.
14.3.3 FMD models

On-farm virus production model
Whenanewinfectedpremisesisdiscovered,thereisanurgentneedtoevaluatewhatopportunities
therehavebeenforfurther spreadofdiseasefromthemomentofvirusarrivalonthepropertyto
thetimeofdiagnosis.Theprobabilityofspreadforeachopportunityisdirectlyproportionalto
thebuild-upofinfection onthefarmandtheconsequentreleaseofvirusintotheenvironment.
AMonte Carlo simulation model thatresimulates the sequence of events onthe farm, and
quantifies the degree of environmental excretion of FMD virus has been developed and
incorporated intotheEpiMAN system.Themodel simulatesthespreadof infection among
animals of the first species infected on the farm, and then to other species on the same
farm, reports the numbers of animals infected/clinical/carriers on a daily basis, and
computesthetotalquantityofFMDvirusliberatedintotheatmosphereonadailybasis;and
in thecase of dairy farms, thedaily concentration ofFMDvirus expected inthe farm milk
supply.
Meteorological spread model

Theon-farmmodelsimulatesthereleaseofFMDvirusintotheatmosphere,asdiscussedabove.
'EnvironmentalSystemsResearch Institute.Redlands,California, USA.
191
Chapter 14
Themeteorologicalmodelisthenrun,usingstandardmethodstoproducevirusconcentrations
in each of a large square of geographical blocks or cells surrounding the source. The
concentration ofFMDvirusforeachcellisaccumulated foreachday,asitisassumed thatif
thereisinsufficient virustoinfect ananimalovera24-hourperiod,theviruswillbeinactivated.
ThegridconcentrationsarethenprocessedbytheGIStoidentify propertiesat risk.
Inter-farm spread model

AtrueDSSshouldallowamanagertoconduct aseriesof'what-if'scenariostoinvestigate
thelikely consequences of major policy options.Interms of managing an FMD epidemic
using astamping-out philosophy, strategies include changing the sizeof the infected area,
adjusting the size of thepatrol zone (standstill zone) around infected premises, instigating
pre-emptive slaughter (dangerous contact slaughter) and implementing aring vaccination
buffer. Inordertotestthesemajor controloptionsadequately,aspatialsimulation modelhas
been developed that operates ontheactual geographical data.
Three infection processes are modelled - local spread, movement related spread and
recrudescence.Toinvestigatealternativecontroloptions,theusercanalterthepatrolzones,
changethesizeoftheinfected area,instigateadangerouscontact slaughterpolicyandcreate
a vaccination buffer. Theentire epidemic can beresimulated with the alternative policies
in operation, or the user has the opportunity to implement changes during a particular
simulation run. Ifthecontrol procedures are adequate,the disease iseradicated. If not, the
dissemination rate remains high and the disease eventually becomes endemic. Outputs of
themodelarethenumbersoffarms diagnosedperday (orperweek),thedissemination rate,
thelengthoftheepidemic,andthenumber of farms tobepatrolled oneach day throughout
the epidemic.
14.3.4 Expert systems

Developmentofasystemtoassignpriorities totracingmovements
One of thebottlenecks identified inthe operation of theEmergency Headquarters was the
follow-up workassociatedwithtracesinvolvingmovementsofpeople,animalsormaterials
onto or off infected premises in theperiod leading uptodiagnosis.Arecent study in New
Zealand has shown that the number of traces which would need tobe assessed per farm
wouldbeover50.Inalargeepidemic involvingmultipleinfected premisesbeing identified
daily, such as the UK 1967/68 epidemic where there were 80 new farms identified as
infected perdayattheheightoftheemergency (Northumberland Report,PartI, 1968),the
number of traces to investigate would quickly place an overwhelming demand on
manpowerresources.
Investigation of traces involves first establishing whether or not there is arisk of FMD
havingbeentransferred withtheparticularmovement.Anexpertsystemassignsriskratings
varying from very high tonil.The assignment of risk ratings isbased on aset of decision
ruleswhichhavebeenincorporated intotheexpert system.Thisprocessidentifies 'at-risk'
properties andpotentially contaminated equipment and vehicles.
192
Examplesof integrated information systemsfor decision making atfarm and national level
Rating of at-risk farms and patrol requirements

There are numerous circumstances that place farms at risk of contracting FMD. These
includebeinginvolved inatracefrom aninfected farm,proximitytoaninfected farm, being
exposed to an airborne plume of FMD virus and being on a dairy tanker route from an
infected farm to the factory. An essential part of managing an emergency is ensuring all
eventsorcircumstancesthatplacepropertiesatriskareinvestigated andthatthesefarms are
monitored accordingtothedegreeofrisk.Anexpertsystemhasbeendevelopedtoconduct
thesetasks.
There are several components tothis system. The first stage records the specific event or
situation that places afarm atrisk.Each of theseepisodesis recorded as anepisode in the
database management system.Foreachepisode,ariskratingisapplied,theearliest dateat
which clinical signs can be expected is derived and the date by which the episode can be
discounted if noclinical signshave appeared computed. Asummary entry isthen recorded
foreachproperty intoanAt-Riskfile,whereacombinedriskvalueisderived for the farm,
theearliest date by which clinical signscan beexpected recorded, the date at which itcan
be recommended that the farm be removed from the patrol list and the optimum patrol
frequency entered.
Technical information database

During an FMD emergency, the range of possible scenarios and the complexity of
interacting factors invariably lead managers to have to make decisions regarding the
eradication of the disease, where the circumstances of the particular farm are atypical.In
these situations, there will inevitably be additional technical information on some aspect
of FMD that would aid the decision maker. Although there is extensive literature on the
epidemiology of FMD, aready source of technical information onFMDatthe Emergency
Headquarters would be areal help. This perceived need has led tothe development of a
knowledge-based technical reference system onthe epidemiology ofFMD.The system is
knownasFMDHELPandhasbeendevelopedusingtheexpertsystemshellNexpertObject.
Basically theuser selectsoneofthebroadcategoriesof subjects relatingtoFMDfor which
technical information isdesired.Theuseristhenpresentedwithalistofsubheadings within
that subject tochoose from. On selection of one of these,afile of specific information is
shown on screen, which theuser can scroll through atleisure. The system then returns the
usertothefront menu containing themajor categories.
14.3.5 Epidemiologist's workbench

Atthepeakofanexoticdiseaseemergencyitwouldbedifficult tospendtimedesigningand
conducting analysestoevaluatetheeffectiveness oftheeradication effort. HenceEpiMAN
contains aset of tools which have been designed in advance either toconduct standard
analyses or tocarry out particular forms of analysis on the data files, with specific details
beingprovided bytheepidemiologist atthetime.Alloftheseprocedures willbe accessible
throughamenusystem,describedastheworkbench.Theywillbecarriedoutbyastatistical
package which hasadvanced analytical andgraphing capabilities.
193
Chapter 14
Forexample,the systemwillbe abletoautomatically build agraphical network on request

to represent itsbest assessment of theepidemiological links between the various infected
premisesdetectedtodate,andwillreassessthenetworkeachtimeanewinfected premises
is found. The shape of the epidemic curve and the estimated dissemination rate will be
calculated, and a forward extrapolation will be made from this. A series of detailed
indicators will alsobe calculated to assess changes in the mechanisms of spread which
appear tobe operating asthe outbreak develops, and toevaluate the extent to which new
infected prem-ises are failing tobepredicted in advance by earlier 'at risk' lists, which
would indicate that unexpected transmission patterns are occurring. Survival analysis and
proportional hazardsregression willbeusedtoassessfactors influencing the development
of local clusters of infected premises.
14.3.6 Economics module

EpiMAN isbeingextended for useinEurope,asthesystemEpiMAN (EU).Aspartofthis
development aneconomic moduleisaddedtothe system (Jalvingh etal., 1995).This will
takedatafrom theoperational datamanagementsystemandusethemtoconduct economic
analyses of alternative policies at national and European Union level. This will be a
macroeconomic analysis system andintegrated withtheinter-farm spread model.
14.4 Extension to other national animal health programs

A substantial amount of work was required during the initial design of EpiMAN to
prototype various alternatives andchoosehow best todevelop an integrated system.Two
of the major design criteria were that the system be capable of operating on various
hardwareplatforms, andthat itbeadaptable toothertasksbeyond FMD.
It is proposed to extend the exotic disease capabilities of EpiMAN beyond vesicular
diseasestocovervariousgroupsofdiseaseswhichsharecommonfeatures, sothattherewill
eventuallybeuptofivevariantsofEpiMANtocovertherangeofepidemicdiseases.Many
of the features willbecommon,but specialized aspects for rabies or insect-borne diseases
can be handled by disease-specific modules which would replace the vesicular disease
module when required.
The system can alsobe adapted for use in control of endemic diseases.In New Zealand
tuberculosis (TB) hasbecome established inthe Australian brush-tailed possum, and this
means thatcontrol ofthedisease involves wildlife aswell asdomestic cattle and deer.A
version ofEpiMAN isbeing designed tousethe geographical capabilities of the systemto
manage thewildlife anddomestic animal aspectsoftuberculosisjointly, using vegetation
and landform information which determine possum ecology to handle possum control
aspects, while in another overlay domestic stock TBcontrol ismanaged within property
boundaries,taking intoaccount stock movement information.
Acomputer simulation model ofTBhasbeen developed inwhichtheepidemiology ofthe
diseaseissimulatedontheactualgeographyofthearea,atmicro-,meso-andmacro-scale,using
athree-tiered modelling approach.Themodelusesparameterestimatesderivedfrom detailed
epidemiological studiescurrentlybeingconductedonthedisease(Pfeiffer &Morris, 1991).
194
The completed system will be able to conduct management procedures and analyses
comparabletothosedescribed forFMD,buttargetedtothelonger-term needsofanendemic
diseasecontrolprogram.Work onthevariousconstituent parts of the system isunderway.
Becausethecontroleffort forTBtakesplacethroughlocalareadiseasecontrol managers,it
isenvisaged that thecomponents of the systemrequired for localcontrol program manage
mentwillbemadeavailableatdistrictoffices, includingthereduced form ofArc/Info called
ArcView,whichenablessimplerGISprocedurestobecarriedoutpurelybymenu selection,
on aPC.
Because of its large international trade in animal products, New Zealand places great
importanceonitsinternational standingas 'cleanandgreen',andhenceonthemaintenance
of quality assurance procedures for products leaving the country. Another capability of
EpiMAN is to manage data concerning such quality assurance procedures as chemical
residue testing and meat inspection findings, linking this back to the farm and area of
origin so that sound claims can be made about the status of product going to various
markets.Development ofthis aspectofthe systemisenvisaged for thenear future.
Because many of the data are common to these various systems and removable disk
cartridges are being used for system-specific data, the same equipment and purchased
software canbe applied to widely different problems over the same period, ensuring that
users are familiar with it in various applications. It will also make it possible to have the
systempermanently ready tohandle anexotic disease emergency immediately, should one
arise.
14.5 Decision support systems for farm use

Herd information systems are currently expanding in scope to become decision support
systems,much asnational disease information systems areevolving inthe same direction.
Inboth cases thisresults inpart from thedevelopment of an increasing range of computer
programs which all usethesamedata.There ispressure from users toavoidre-entry ofthe
samedata,andbothhardwareandsoftware developments aremakingthiseasiertoachieve.
Intechnicalterms,thislinkingofsoftware andthecapacity for different programs toaccess
the same data file iscalled 'seamless integration'. With appropriate care separate pieces
of software canbe integrated by sharing acommon interface and menu system, sothat a
single main menu gives access to alternative programs, and transfer of data from one
program totheother istransparent totheuser.Both may make use of asingle data file, as
long astheprograms respect the rulesconcerning file opening and closing, and especially
obey thesamerulesconcerning filemodification. Increasingly, software ismoving towards
complyingwiththeCommonUserAccessrules,whichmeansthatallprogramslookandact
in similar and consistent ways. Twoexamples will be given of herd systems which are
developing thefeatures of decision support systems.
14.5.1 Pig herd decision support

The pig records system PigCHAMP was developed in the US at the University of
Minnesota in the 1980s,and has nowbecome the most widely used system of its kind in
195
Chapter 14
the world. Initially it dealt only with thebreeding herd,but it has since expanded tocover
the growing herd. Moreover, an overallfinancialanalysis of theherd wasincluded, andan
interface to afarm accounting package so that accounting data can be shared between the
programs.Acomprehensive databaseevaluationmodulewithinPigCHAMPallowstheuser
to gobeyond predefined reports toproduce avariety of types of graphical and text reports
on over200variables,withuser-selected inclusion andexclusion criteria.Inthis waygreat
flexibility toproduce epidemiologically valid reports can be achieved without sacrificing
simplicity ofaccess.
There is also adirect interface through aPigCHAMP menu item to asimulation model of
the pig breeding enterprise, PigORACLE. This allows current herd productivity data and
herdcompositiontobeusedtocreateaforward prediction forthenextsixyearsofphysical
and financial performance of the herd, and then to vary the price and performance
assumptions and evaluate the sensitivity of performance to these changes. Equivalent
modelsforthegrowingherdhavebecomeavailableinrecentyears(Black&Barron, 1988),
and there are plans to link one or more of these growth models to PigCHAMP to allow
evaluations of feed formulation and management tobe conducted within the overall herd
information system. These models of growth are technically very complex, and make
available totheuser asynthesis of experimental data andfieldexperience inthe form ofa
predictive modelfor thegrowing pig.
Expert systems are alsobeing added tothe total system atpresent. CHESS (Computerized
Herd Evaluation Systemfor Sows) assesses theperformance of asinglebreeding herd in
relation toitsown previous performance and inrelation toperformance of apeer groupof
herds over asingle time period and over a series of time periods. Itreports back likely
sources of suboptimal performance, which can then be investigated further (Huirne etal.,
1992).Itisbeing interfaced directly toPigCHAMP, sothat CHESS evaluations can berun
as aPigCHAMP menu selection, using peer group data for achosen 'comparison group'
of herds. PigCHAMP is able to do comparative analyses on upto 200 herds,which will
generate the peer groupdata for such analyses.If reproductive performance in the herd is
found tobesuboptimal,thenasecondexpert systemPigFIX (FertilityInvestigation eXpert)
is being developed (Wongnarkpet etal., 1993) toautomatically run and analyse various
reproductivereportsavailablewithinPigCHAMP.Itwillthenguidetheusertoissueswhich
deserve priority in herd investigations. A third system, TACT (TActics and ConTrol)
simulates herd production, reproduction and replacement policy, and recommends an
overall policy for the herd dependent on its performance, and will assess what action is
economically optimal for individual culling decisions (Jalvingh, 1993).
The system is also being extended to incorporate other data. For example, both carcass
data and slaughter inspection data can now be returned to farm files electronically, and
used inacomparative evaluation of occurrence of lesionsin theparticular herd versus its
peers. Othercomplementary modules ofasimilarnature areplanned for the future.
Electronic identification by transponder is gradually emerging as apractical technology
for animal recognition, and is likely tobecome widely used over thenext decade. Already
in use andlikely tobecome more widely accepted isthe use of electronic identification in
196
Examplesof integrated information systemsfor decisionmaking atfarm and national level
combination withhand-helddataloggers/computers,insomecaseswithFMradioexchange
of datawith thecomputer which isstoringtheprimary records,andwhich islocated inthe
farm office. Inthiswayseamlessintegration canoccurthroughout theprocess from animal
recognition toreportproduction and evaluation.
14.5.2 Dairy herd decision support

A similarprocess isoccurring in dairy herds.In North America programs such as Dairy
CHAMP aredeveloping the samedegree of functional integration, and in the Netherlands
advanced economic modelsarebeing developed tosimulate and optimize farm- andcow-
specific insemination andreplacementdecisions (Jalvingh, 1993;Houben, 1995)whichcan
be integrated intothe system.
InNewZealand andAustraliaDairyMANisdesignedtoprovidecomprehensive support for
pasture-based dairy herds.DairyMAN contains acoreinformation system which handles
production, reproduction and health data, and analyses these in both report and graphical
formats. The system is now fully integrated with the national dairy herd recording and
artificial insemination system,sothatdatacanbedownloaded fromthenational databaseto
create(andinmostcasesmaintain)thefarm database.Plansareinhandtoupload data from
the farm to the national database as well. Work has commenced on an expert system
DairyFIX (McKay etal., 1988) which will evaluate herd performance in much the same
way asPigFIX willdofor pigherds.In otherplaces expert systems arealready employed
for purposes such asanalysis oflactation curves (Fourdraine etal.,1992).
Therearespecialproblemswithmodellingpasture-based livestockproduction,whichmake
development of a model of a grazing farm much more difficult than one of a housed
enterprisesuchasapigfarm.However,amodel,FarmORACLE,hasbeendevelopedwhich
simulates afarm on ageographical surface comprising apaddock layout specified by the
user, together with agronomic details for eachpaddock. All major grazing species inNew
Zealand canbeallowed for, andthedairyherdwhichissimulated canbetheonestored in
DairyMAN. Farm management can be simulated with appropriate management decisions
andpaddockrotations,withoutputconsistingoffinancialandphysicalperformance indices
(Butler &Morris, 1993).
As milking parlour management and data gathering become increasingly automated, more
and moreuse isbeing made of integration between different methods of measurement of
production, mastitis,oestrus activity and othervariables of interest tothe farmer. Because
of the large flow of information which arises from such systems and the difficulty in
discriminating abnormal from normalpatterns,suchtechniques asneural netanalysis are
beingused inaneffort todistillthedatadownintouseful management aids(Nielen, 1994).

Developments in hardware and software design over the past two decades have laid the
foundations forinformation management inanimalhealthtomovegradually from whatcan
nowbeseenasrelatively primitivebeginningstotightlyintegratedsystemswhich provide
verypowerful support for management,evaluation of options anddecision making inboth
197
Chapter 14
national disease control programs and herd management systems. In many ways these
represent the embodiment of the current state of epidemiological thinking in the form of
integrated processing and analysis systems which use the techniques of epidemiology and
economics within practical management systems. In this way current epidemiological and
economic thinking becomes accessible to decision makers without the need for them to have
direct involvement in determining how the data are analysed and presented to them.
References
Berke, P. & Stubbs, N., 1989. Automated decision support systems for hurricane mitigation
planning. Simulation 53: 101-109.
Black, J.L. &Barron, A., 1988.Application of the AUSPIG package for the management of pigs.
Proceedings Australian FarmManagement Society 15: 5-1 to 5-10.
Butler,B.M.&Morris,R.S., 1993.FarmORACLE:Asoftware packagefor simulating management

of agrazing farm. Massey University, Palmerston North.
Fourdraine, R.H., Tomaszewski, M.A. &Cannon, T.J., 1992.Dairy herd lactation expert system, a
program to analyze and evaluate lactation curves. In Prospects for Automatic Milking: 331-337,
Pudoc Publishers, Wageningen.
management.PhD-Thesis,Department ofFarmManagement,Wageningen Agricultural University,
Wageningen, 146pp.
Huirne,R.B.M., Dijkhuizen, A.A.,Renkema, J.A. &VanBeek,P., 1992.Computerized analysis of

individual sow-herd performance. American Journal ofAgricultural Economics 74:388-399.
Department of FarmManagement and Department of Animal Breeding, Wageningen Agricultural
University,Wageningen, 164pp.
Jalvingh,A.W.,Nielen,M.,Dijkhuizen, A.A.&Morris,R.S., 1995.Computerized decision support

system for contagious disease control. Pig Newsand Information 16:9N-12N.
Lorenz, R.J., 1986.Economic evaluation of thefoot-and-mouth disease vaccination programme in

the Federal Republic of Germany. Report, Federal Research Centre for Virus Diseases of Animals,
Tubingen, FRG,July 1986.
Marsh, W.E., 1986. Economic decision making on health and management in livestock herds:
304pp.
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McKay, B.,McCallum, S. &Morris, R.S., 1988.An expert system for diagnosing reproductive
problems in seasonal dairy herds.Proceedings of theFifth International Symposium on Veterinary
Epidemiology and Economics,Copenhagen: 480-482.
Morris, R.S., 1991.Information systems for animal health: objectives and components. Revue
Scientifique etTechnique del'Office International des Epizooties 10: 13-23.
Nielen, M., 1994. Detection of bovine mastitis based on milking parlour data. PhD-thesis,
Department of Herd Health and Reproduction, Utrecht University, Utrecht, 165pp.
Northumberland Report,Part 1,1968.Reportofthecommitteeofinquiry onfoot-and-mouth disease

1968,Part One.Her Majesty's Stationary Office, London.
Pfeiffer, D.U. &Morris, R.S., 1991.Alongitudinal study of bovine tuberculosis in possums and
cattle. Proceedings of Symposium on Tuberculosis, Palmerston North: 17-39. Foundation for
Continuing Education of theNew Zealand Veterinary Association.
Sprague, R.H. &Carlson, E.D., 1982.Building effective decision support systems. Prentice-Hall,
Inc.,Englewood Cliffs, NewJersey, 329pp.
Thrusfield, M.V., 1983.Application of computer technology to the collection, analysis and use of
veterinary data. Veterinary Record 112:538-543.
Thrusfield, M., 1986.Veterinary epidemiology. Butterworths, London, 280pp.
Wongnarkpet, S., Morris, R.S.&Stern, M., 1993.PigFIX: A software package for analysing pig
reproductive records.Massey University,Palmerston North.
199
15
Profitability of herd health control and management
information systems under field conditions
A.A. Dijkhuizen 1 ), J.A.A.M.Verstegen 1 ), R.B.M. Huirne 1 ) &A. Brand 2 )

Netherlands
2) Department of Herd Health and Reproduction, School of Veterinary Medicine, Utrecht, the
Netherlands
Objectives
• basicrequirementsforaneconomicanalysisoffielddataonanimalhealthand management
support
• theprofitability of herd healthcontrol programs
• theprofitability of management information systems
15.1 Introduction
As also indicated in Chapter 2,veterinary services to individual farms are increasingly
changing from the so-called first-aid practice or fire-brigade approach into planned
prevention and control programs.For asound economic analysis of such programs, data
from both the 'with' and 'without' situations shouldbe available (Dijkhuizen, 1992).This
may be realized in two ways: data from 'before' (b) and 'after' (a) application of the
program, collected on farms participating in the program (P), as well as on comparable
control farms (C).Whenavailable,these datamakeitpossibletoestimatethecausal effects
oftheprogram moreprecisely,ie,(Pa-Pt,)-(Ca-Cjj),especially whenparticular herdswith
obvioushealth andmanagementproblemstakepartintheprogram.Collection ofdatainthe
'without' situation should be doneconcisely, however. Otherwise an interference with the
program may occur,leading toanunderestimation oftheprogram effects.
Inthischaptertwofieldtrialsintheareaofanimalhealthandmanagement supportthatwere
designed and analysed alongthese lines arepresented and discussed. Thefirstapplication
includes a2-year herd health and management program in dairy cattle, carried out on 30
program and 31 control farms (Soletai, 1984).The second one focuses on the so-called
management information systems (MIS) on pig farms, designed to support the farmer's
management by providing information ontheperformances of single animals and theherd
as awhole (Verstegen etal., 1995).
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Chapter 15
15.2 Herd health and management control in dairy cattle

In the Netherlands, a2-year dairy herd health and management program was carried out
from 1974/75to 1976/77,including 30program and 31control farms. Theprogram wasa
jointexperimentoftheAnimalHealthServiceandtheAgricultural Extension Serviceinthe
province of Overijssel. Each of the 37extension workers was asked to select three dairy
farms with at least forty cows and without specific herd health problems. Further
requirements were a modern housing system for cows and youngstock, artificial
insemination,milkrecording,roughageanalysisandareasonableeconomicandherd health
recording system. Theprogram and control farms were randomly chosen from each setof
three, the third farm being excluded from the trial. Seven program and six control farms
were excluded from theinitialprogramevaluation becausethey did nothave the necessary
economic data atthetimeofanalysis.
The year 1974/75wasused asabase yearinwhichrelevant data werecollected from both
groups before the program started. During the program years (1975/76 and 1976/77), the
program farms were visited every six weeks by the veterinarian of the Animal Health
Service,thelocalveterinarian andthelocalextensionworker.Thesevisitsprimarily focused
on reproduction, udder health, foot care,nutrition, cow culling, grassland exploitation and
economic results.Thecontrolfarms werevisited twiceayear,onlytocollectthenecessary
data.
Table 15.1Comparison of program and control farms before and during the experiment
Situation 'before' Changes during | program
(1974/75) (1976/77 -197 '4/75)
30P 31C P-C 30P 31C P-C
Labour equivalents 1.7 1.6 0.1 -0.1 0.0 -0.1
Grassland area (ha) 31.1 24.7 6.4* 0.3 2.3 -2.0
Dairy cows (no) 69.3 60.9 8.4* 4.7 6.6 -1.9
Fertilizer (kg N/ha) 300 351 -51 42 -24 66*
Milk per cow (kg) 5121 5123 -2 524 390 134

Calving interval (d) 378 376 2 -5.3 3.3 -8.6*
Cell count (xl000/ml) 240 330 -90 -20 20 -40
Total culling rate (%) 21.4 18.7 2.7 0.0 7.1 -7.1*
for reasons of:
-health/fertility probl. 12.6 10.6 2.0 0.1 5.9 -5.8*
Revenues (US$/cow) 1740 1768 -28 452 385 67

Feed cost (US$/cow) 569 576 -7 198 227 -29
Margin (USS/cow) 1171 1193 -23 256 158 98
*p<0.05
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Profitability of herdhealth control andmanagement information systemsunder field conditions
Table 15.1showsacomparisonbetweentheprogramandcontrol groupbefore andafter two

yearsofprogramapplication.Inthepreparatory year(1974/75),thegroupsshowed nolarge
differences. The farms of the program group were slightly larger (hectares of grassland
andnumberofcows)andappliedsomewhatmorenitrogenperhectare.Milkproduction per
cow and health and fertility parameters (including culling data) did not differ between the
groups, nor did the costs and returnsper cow.The effects of theprogram were measured
bycomparingbothgroupsforthechangesinthevariousparametersperfarm duringthetwo
successive years of program application. Neither group showed much difference in the
development of farm structure (labour force, herd size, grassland area), although the
program group increased nitrogen fertilization, compared with the control group.
Statistically significant effects werefound, regardingbothcalving interval and replacement
rateofcowsbecause of illhealth and reproductive failure. Regarding udder health (ie,cell
count) no significant effect was found. The average increase in the margin of revenues
overfeed costpercowturnedouttobeUS$256intheprogramgroup,which isUS$98more
than in thecontrol group.Additional -veterinary -costswere estimated to average US$20
atthemost,indicating thisherd healthprogram tobeasound investment.
Fromboththefarmers' andveterinarians' point ofviewitisalsoimportant toknowwhether
ornot suchprograms shouldbeapplied onamorethantemporary basis.Fromthese farms,
therefore, dataweregathereduntiltenyearsafter participating intheprogramexperimentto
seewhethertheinitialeffect onincomehadincreased,decreased orremainedthesame.The
necessary datawerenotavailable onall61farms.Therefore, twonewgroupswere formed,
consisting of 15program farms and 20control farms respectively. Since the initial and
new groups differed in number, the short-term program effects were also re-evaluated.
Results aresummarized inTable 15.2.
Table 15.2Margin over feed cost per cow per year (US$)on the program (P)and control (Q
farms
Initial groups New groups
30P 31C P-C 15P 20C P-C
1974/75 1170 1193 -23 1156 1191 -35
1976/77 - • 1974/75 256 158 98* 232 167 65
1976/77 1426 1351 75 1388 1358 30
1980/81- • 1976/77 235 414 -179*
1980/81 1623 1772 -149*
1985/86 - 1980/81 599 575 24
1985/86 2222 2347 -125
*p<0.05
During the years of program application (1975/76 to 1976/77) margin over feed cost per
cow in the initial groups increased significantly more (US$98) onthe program farms than
onthecontrolfarms,asalsoindicatedbefore inTable 15.1.Inthenewgroupstheshort-term
program effect wassmaller (US$65),and not statistically significant, but showed the same
203
Chapter 15
tendency. In the first few years after the program had finished (1976/77 to 1980/81),
margin over feed cost percow increased significantly more (US$179) onthecontrol farms
than ontheprogram farms, asaresult ofbothhigher milkproduction andlower feed costs.
In the period 1980/81to 1985/86 the increase in income for both groups was almost the
same, ie, between US$575 and US$600 per cow. So, the initial increase in income soon
had disappeared after the program had been finished. Such an outcome is not totally
unexpected, but - at least beforehand - opinions often differ on this issue. Farmers'
decisions, however, have tobe taken under continuously-changing price and production
conditions.Insuchdynamiccircumstances,therefore, itseemstobeprofitable toapplyherd
health and management programson farms onamorethan temporary basis.
15.3 Management information systems in pigs

Alongitudinal survey was carried on 71pig farms in 1992,about 10years after the first
introduction of MIS. Allfarmers already participated inasocio-economic survey in 1983,
henceforth referred toasthe 1983survey.Inthe 1983survey,varioussociological,technical
and economic data of thefarms wererecorded. Veryfew farmers made useof MIS atthat
time, which means that the 1983data could very well serve aspretest data. In the 1992
survey,data onMIS use andtechnical production data of theentire period inbetween the
two surveys (1983 to 1992) were collected and formed aunique panel data set. In this
period, some farmers startedtouseMISwhile others didnot.
The objective of the 1983survey was torelate farmers' characteristics totheir production
performance. Thesurveywasconductedbymeansofaquestionnairethatwasdistributedby
farm advisers.Theresearchpopulation ofthe 1983surveywasselected usingthe following
three criteria: (1) the pig farms should include sows aswell as fattening pigs,(2) the pig
farms should belocated inthe operating area of the state advisory service, and (3) thepig
farmers should be amember of the state advisory serviceduring the entire year of 1982.
Animportant consequence ofthislastcriterion wasthat allfarmers madeuseofthecentral
Herd Record System which wasmaintained bythe advisory service.This means that all
selected farmers received basic information about their farm performance. Hence, farmers
with only manual record keeping practices or farmers with norecord keeping at all were
excluded. The only criteria in the 1992 survey were that: (1) the participants also
participated inthe 1983survey,and (2)they still operate apig farm.
The objective of the evaluation study was to evaluate the effect of MIS on the average
number of piglets per sow per year. The panel data were statistically analysed through
analysisof varianceprocedures.Hypotheses aboutfactors thatmayinterfere withthe effect
ofMISonfarmresultsledtotheinitialformulation ofthestatisticalmodeldescribedbelow.
With this model, the annual observations of the parameter 'number of piglets per sow
peryear'overtheperiod 1982to 1991areexplained.Thegreatadvantage of havingpanel
data is that effects can be estimated within farms. In this way, distorting effects (such as
management quality and motivational aspects ofthe farmers) canbeexcluded by inserting
aFARMeffect intothestatistical model.Inregression terms,thiscanberegardedashaving
one dummy variable for each individual farm (except for thelast farm because thisfarm is
204
Profitability of herd health control and management information systems under field conditions
already defined by then-1otherdummy variables).Theadvantage of having multiple time

series is that year effects canbeestimated across farms. The process of MIS installation,
data entry,learning and,finally, useof its information in farm management takes time and
delaysthebenefits comingfromMIS.Includingthisstartingperiodintheestimation ofMIS
effects would cause an underestimation of the effect. Therefore, adummy variable 'First
YearAdjustment' (FYA)wasdefined. ThevariableFYAcorrectstheMISeffect for starting
problems and for nothaving MISduring theentire year of adoption. For example, whena
farmer startsusingMISinNovember 1984,aneffect ofMISonthe 1984parameter 'number
of piglets per sow per year in 1984' can hardly be expected. Toestimate the MIS effect, a
dummy variableMISwasadded tothemodel and sowasaFARM xMIS interaction. This
interaction accounts for differences inMISeffects among farms. It was hypothesized that
the value of information and thus the value of MIS depends on the information that is
already available tothe user. For example, farmers with atradition of intensive recording
of sow data are likely toreceive less added value of MIS than farmers who obtain more
detailed information thanbeforeMISuse.Itwasalsohypothesized thatthereexistsaFARM
xFYA interaction indicating that some farmers have fewer problems starting to use MIS
than others. This interaction was not significant and was removed from the final model.
Eventually the following model wasestimated:
Y
ijkl =YEARj + FARMj + FYAk + MISj+ FARMxMISjj+ eyy
(p<0.001) (p<0.001) (p=0.09) (p=0.08) (p<0.001)
where
Y =
pigletsper sowperyear;
YEARj =
yeareffect (i=1982, 1983...., 1990, 1991);
FARM; =
structural farm differences (j = 1...71);
FYA^ =
first yearadjustment (twolevels:k= 1 inthefirstyearthatan
MISismentioned; otherwise k=0);
MISj = MISeffect (1=0:noMISuse; 1=1:MISuse);
FARMxMIS;]= interaction between farm effect and MISeffect; and
ejjy = mutually independent error terms:N(0,a^).
The significant maineffects, ie,YEAR,FARM,FYAandMISandtheinteraction FARMx

MIS accounted for 80% of the total variation of the number of piglets per sow per year
(R -0.80).Withthismodel,theeffect ofMISonthenumberofpigletspersowperyearwas
estimated.Theaverage valueoftheFARMxMIS-interaction-termwasadded tothe 'pure'
MIS effect. Thisresulted in an average MIS effect of 0.56 piglets per sow per year.This
means that using MIS increased the level of theyearly production by 0.56 piglets persow
(from the second year of MIS use onwards). The profit of MIS use equalled US$15 to
US$17 per sow per year, meaning areturn on investment of 220 to 348%and 7.7 to 8.7%
of afarmer's typical incomeper sowper yearin theNetherlands.
Anotherimportant outcomeofthestudywasthattheMISprofitability differed significantly
205
Chapter 15
among farms. Anin-depth analysis onthe differences among farms was conducted, using
the sociological classification methods that were included in the survey study in 1992.
Farmers were divided into categories based on their management quality and styles of
farming. 'Styles of farming' is aself-classification method. In anearlier study, four short
descriptionsoffarming styleswereconstructedbasedon 'open-attitude interviews' withpig
farmers (Appendix 15.1).Inthe survey study, the farmers hadtoselect thedescription that
fitted inbest withtheir opinion on 'how apig farm shouldbe managed'. The management
quality classification depends on aseries of questions on farmers' training and education,
modernity of farm facilities, farm policy, tactical and operational planning and social
aspects.The survey farmers completed the questionnaire and farm management experts
rated theanswers.
Analysispercategorydemonstratedthatgreatdifferences inMISeffect existbetween styles
of farming. Moreover, the two most extreme categories of management scores are
significantly different, suggesting apositive relationship between MIS profitability and
farmers' management quality (Table 15.3).
Table 15.3MISeffect in relation with sociological classification methods

Number of Number of
Classification farmers MISusers
method Category per category per category MIS effect 3
Stylesof farming 'entrepreneur' 10 7 +1.41
'manager' 44 27 +0.42
'pig farmer' 16 10 +0.49
'withdrawer' 6 1 -0.69
Scoreson management <380 b 19 9 -0.48c

questions 381-445 19 12 +0.67
(range:1-1000) 446-520 20 12 +0.38
>520 18 12 +1.42c
ü e
Total 76 45 +0.56
a
Defined aschanges intheaverage number ofpigletsraisedper sowperyear
0
Thresholds weredefined toget anequalnumber of farmers percategory
c
Thetwocategories aresignificantly different (F-test: P<0.05)
" Fiveofthemhave notparticipated inthe 1983survey
e
Fifty-four farms used MISbutonly45of themcouldprovideproduction databefore and
after MISuse,and thuscontributetotheMIS estimate
15.4 Future outlook

Both field trials in the area of animal health and management support described in this
chapter showedthat itis actually possible toinfluence and improve farmer's management.
Both studies also showed considerable differences inimprovement among farms, and itis
achallengeforfuture researchtofindoutwhyandhow.Adisadvantageofsurvey studiesin
206
Profitability of herdhealth control andmanagement information systemsunder field conditions
thisrespect (such astheMIS application inthischapter) isthat they cannot prove causality
ofrelationships found. Uncontrolledeffects mayhaveinterfered withtherelationship found.
Field experiments (such asthe herdhealth application) have greatercontrol on intervening
variables but are not frequently applied duetopractical limitations.Requirements arethat
none of the farmers already uses the program under consideration, that every farmer
participatesvoluntarily,andthatnocontamination (information exchange)between thetrue
control and program group takes place.It isnot easyto get people participate voluntarily,
especially not when they are assigned to the control group. Moreover, conducting
experiments in the field istime-consuming and expensive. Experimental economics isa
means tobenefit from the strengths of field experiments and to overcome some of their
practical limitations (Davis&Holt, 1993).Inthisapproachpeople solvedecision problems
inalaboratory environmentthatareabstractrepresentationsofthenaturaldecisionproblem
under consideration. Thebasic assumption of experimental economics is that theresults,
obtained in alaboratory environment, represent the more complex natural environment.
Experimental economicinstitutionsneedtohavesometypicalcharacteristicstoachievethis
(Smith, 1982).The key elements of thenatural decision-making environment (eg,typeof
decision problems,information supply) havetobeincorporated intotheabstract laboratory
institution. Another typical characteristic of experimental economic institutions isthat the
participants receive monetary incentives; they get paid in cash according to the
effectiveness of their decisions. Experimental economics is considered a promising
approach to gain further insight intothe profitability of animal health and management
support ingeneral, andthedifferences ineffects among farms in particular.
References
Davis,D.D.& Holt,C.A., 1993.Experimental economics.Princeton UniversityPress,Princeton,
NewJersey,572 pp.
Dijkhuizen, A.A., 1992.Modelling AnimalHealth Economics.Inaugural speech,Wageningen

AgriculturalUniversity,Wageningen,28pp.
Smith, V.L., 1982.Microeconomic SystemsasanExperimental Science.American Economic

Review72: 923-955.
Sol,J., Renkema, J.A.,Stelwagen, J., Dijkhuizen, A.A.& Brand, A., 1984.Athree-year herd
healthandmanagementprogramonthirtyDutchdairyherds.TheVeterinaryQuarterly6:141-169.
Verstegen,J.A.A.M.,Huirne,R.B.M.,Dijkhuizen,A.A.& King,R.P.,1995.Quantifying economic

benefits of sow-herd management information systemsusingpaneldata.American Journalof
AgriculturalEconomics77: 387-396.
207
Chapter 15
Appendix 15.1 Portraits of 'styles of farming'
Portrait 1- entrepreneur
I consider myself an entrepreneur. My aim is to follow new developments as well as
possible. Imake sure that Iamready for the future. My farm is well structured. Ihave a
good idea of what is going on on my farm because Ihave a strong work plan and many
production figures thatshowmehowIamdoingmyjob.Iconsideritachallengetohavethe
best production results. Ifind stories of other pig farmers (in farm magazines or at peer
meetings)usuallynotveryinteresting.Farmmagazinesandfarm advisershave animportant
task inkeeping meinformed. However, Idraw theconclusions myself.
Portrait 2- manager
Theeconomy goeson and,therefore, apig farm hastoexpand tokeepinpace.However,it
isnot my aimthatthe farm growsbutreachesahighadded valueperanimal.Idonotenvy
farmers havingthose giganticfacilities; theyhavetoworkhardtokeeptheirbank satisfied.
I prefer having some leisure time todo something other than pig farming. To get ahigh
addedvalueperanimal,contactswithotherpigfarmers (eg,peermeetings) arevery useful.
Farm advisers must beabletothink along themany aspects ofpig farming, and should not
betoo specialized.
Portrait 3- pig farmer

Ilove working with animals onthefarm. Ienjoy my pigs performing well.Health careof
the animals is one of my major topics in farm management and keeps the involuntary
replacement costs low.I avoid risks as much as possible. Advice of the farm adviser or
veterinarian areacrucialelement.Technical andfinancial recordkeeping hastobedone,but
it is something Idonot like and costs too much time.If the government does not put too
many restrictions on pig farming, we can keep ourbusiness going for many more years
because wekeepagoodeyeonourcosts and avoidrisks.
Portrait 4 - withdrawer
Iam abit older and probably donothave an heir.Iregularly make some new investments
onmy farm, but Iwill notexpandmyfarm any more (even if Iwere allowed todoso).My
investments are intended to make farming easier. I do not invest in entirely new
developments such as a management information system. The farm advisers and the
veterinarian give good advice which Iusually implement. Governmental regulations give
me an awful lotof paperwork. Itisatoughjob tokeeppace with all of thesethings.
208
16
Disease control programs in developing countries:
prospects and constraints
B.D. Perry
International Livestock Research Institute (ILRI), Nairobi, Kenya
Objectives
Fromthischapter thereader shouldgainknowledge of:
• the major prospects and constraints ofproviding disease control programs in developing
countries
The examples and experience summarized inthis chapter refer tovarious types of disease
andregions.
16.1 introduction
What is so particular about the practice of disease control in developing countries?
Developing countries have received several labels over the past few years, including
'underdeveloped', 'less developed', 'third world' and 'non-industrialized'. What
characterizes them? TheWorld Bank andothers have developed systems of ranking such
countriesonthebasisofeconomiccriteria.Threeorfourmajor criteriaseemtobeimportant
in such rankings. These are (1) a 'low' gross national product per capita, (2) a 'high'
proportion of peasant and subsistence farmers, with accompanying 'low' levels of
education, and (3) a 'poor' infrastructural and communications network. Clearly, the
qualitativenatureof 'high', 'low' and 'poor' meansthatthereisawidevariation inthestage
of development within the developing world; too simplistically, distinctions are routinely
made on a purely geographical basis, between East Asia, Latin America and Africa.
However, this wide variation in the degree of development applies also within each of
these three geographical areas.Thus,although this chapter will be restricted for the most
part toconsidering Africa, they will alsohave relevancetoother parts of the developing
world.
How dothecharacteristics of developing countries relate todifferences in animal disease
control? This is best considered by examining the principles of disease control, and
exploring how the attributes ofdeveloping countries affect them.Effective disease control
has four major requirements:
• problem identification and characterization;
• availability ofeffective diseasecontrol technologies (vaccines,drugs,etc.);
• methods todeliver thetechnologies andtheknowledge astotheireffective use;and
• successful adoption anduseofcontrol measuresby farmers.
209
Chapter 16
Clearly, all of these features are constrained in developing countries toagreater or lesser
degree. Historically, the first three of them have generally been centralized under
government control, while the fourth hasbeen largely ignored; people have been expected
to do what they are told. However, the dramatic reductions in funding to government
veterinary services inmanyregions of theworld, accompanied bycallsfor newthoughton
the delivery of veterinary services (Anteneh, 1983, 1985;De Haan &Nissen, 1985;De
Haan &Bekure, 1991;Schillhorn vanVeen&DeHaan, 1994)areleading ustoreconsider
how effective disease control can still be achieved under the constraints experienced in
many developing countries. In this chapter prospects and constraints are considered for
improved disease control programs under the four features of disease control provided
above.
16.2 Problem identification

Historically,determining thediseaseconstraints inmanycountries ofthedeveloping world
has been an exclusive responsibility of government, mostly run through passive disease
reporting systems, and inthe past this has often been restricted to alimited section of the
livestock production systems in acountry. From the turn of this century, when much of
Africa wascolonizedbyEuropean settlers,untilthepolitical independenceofmost African
countries achieved in the early 1960s,disease control priorities were determined largely
on thebasis of theproblems affecting thelivestock enterprises of the settler communities,
and effected by government veterinary services serving these communities. Veterinary
officers made regular reports of conditions diagnosed clinically during thecourse of their
duties,andthefew veterinary diagnostic laboratories reportedtheirfindings onthesamples
submitted to them. This focus of problem identification on thecommercially orientated
producers madeeconomic sense atthetime,giventhemuchhigher economic output ofthe
European-run livestock enterprises. As far as disease reporting wasconcerned, data were
reasonably representative of their production systems in this passive disease reporting,
given the economic resources, relative mobility and level of education of the veterinary
officers responsible. At independence, this system of disease reporting remained inplace,
and has continued inmost African countries tothis day.But theconditions under which it
operates have changed dramatically in some countries, rendering it ineffective in many
places. First, the livestock populations it serves have changed in three major ways -the
subsistence and peasant farmers have demanded the same services previously largely
restricted to the large-scale farmers; the proportion of large-scale farmers has reduced
dramatically; andtheproduction systemsthemselves havechanged inmanyareasasaresult
ofincreased humanpopulation density andhigherlevelsofdemand for livestock products,
among many other factors. Second, the 'diagnostic capacity' of the government veterinary
serviceshasdeclined.This isduetoboth adecline ingovernment funding tosuchservices,
reducing the frequency and quality of daignoses made,and the extension of the service to
amuchlarger farming community withfar lessinthewayofeconomicresourcestoexpend
on veterinary diagnostic services. Third, both of these factors have resulted in disease
reporting becoming unrepresentative of the farms and production systems of many
210
Disease control programs in developing countries: prospects and constraints
countries, affecting the appropiateness of resource allocation todisease control programs.

Theconstraints areclear,but what arethe prospects?
The identification and characterization of animal health problems cannot be effectively
achieved through the passive diseasereporting systems still inplace in much of Africa, a
conclusion endorsedatarecentExpertCommitteeoftheFoodandAgriculture Organization
of theUnited Nations (FAO, 1995).This groupadvocated more focused, activestudieson
subsets of the population totackle specific diseases of concern, or specific production
systems and geographical areas of interest. These might be achieved through carefully
designed sample studies (eg,Deem etal, 1993) or through prospective studies (eg, Gitau
et al., 1994), in which disease incidence and the relationship between disease and
productivity loss can be measured. Not only should much of the emphasis in design be
moved from passive reporting toactive studies,butthere should alsobe aclear division of
responsibility for financing this work. Thus governments, intent on safeguarding their
international trade inlivestock and livestock products,for example, shouldbe responsible
for reporting on diseases which severely disrupt this, such as foot-and-mouth disease and
rinderpest, whereas farmers shouldbe responsible for sponsoring the reporting of diseases
affecting theirlevelsofproduction,suchasmastitisandreproductivedisorders,inorderthat
they can use thisinformation toenhance theiroutputs.However, some diseases do not fall
clearly into either of these categories, and these include those affecting human health.
Furthermore, governments, possibly assisted by universities, are likely to retain
responsibility for geographical areas and production systems with very low economic
outputs,for reasonsofequity and social welfare. Butitisnot assimple asthat, and herein
lies one of the greatest prospects for improved productivity in the developing world. The
developed world has shown that the involvement of farmers themselves in problem
identification throughproduction performance recording schemes hasyielded huge returns
in terms of increased production efficiency. Whereas it is not to be foreseen that every
smallholder dairy farmer in Africa will have anotebook computer for a few years yet,
there is an opportunity for dairy cooperatives, farmers societies and product societies to
make effective use of the surplus veterinary manpower in some countries to develop
performance profiles for the production systems of their members,the first step towards
farmer-driven problem identification and decision support systems (Van Schaik et al.,
1995).
16.3 Effective disease control technologies

The poor availability of drugs, vaccines and chemicals has often been cited as the main
reason for suboptimal animaldiseasecontrol inAfrica. Althoughthereareseveral diseases
which severely constrain livestock productivity and development for which no adequate
control measures are at our disposal (most notably trypanosomiasis and the tick-borne
diseases),productivity oflivestockcouldbeenhanced dramatically ifonlythetechnologies
wedopossess could be effectively delivered. There are clearly several issues here. These
are:technology development (through research) toproduce newwaystocontrol diseases;
technology manufacture anddistribution ofdevelopedproducts;andtechnology deliveryto
211
Chapter 16
the farmers toreduce the effect of poor animal health on livestock productivity. It is the
first two of these that willbe considered in this section (the third will be addressed in the
nextone).
Theworldstilldoesnothaveeffective meanstoprevent someoftheinfectious diseasesthat
are widely prevalent in the developing world. These diseases include trypanosomiasis,
theileriosis,cowdriosis,babesiosis,anaplasmosis anddermatophilosis among manyothers.
For all of these, drugs totreat infections exist and are widely available, but given their
high cost and the constraints to their timely delivery in the early stages of infection in
order tobe effective, they arenot asustainable option for many production systems in the
developing world. Disease prevention is thus a more sustainable approach, and this
generally meansvaccines (aswell astheexploitation of genetic resistance todiseases).For
some of the infections mentioned, vaccines are available,but thelability of many of them
(such as the blood-based and tick stabilate 'vaccines' which require strict refrigeration)
renders them difficult todeliver inmanyproduction systems of thedeveloping world, and
inappropriate inothers.Thus muchbasic strategic research remains tobe doneto develop
effective and safe vaccines for these infections which are appropriate for use in the
developing world. Within the Consultative Group on International Agricultural Research
(CGIAR) this has been the role of the International Laboratory for Research on Animal
Diseases (ILRAD), inconjunction with other animal health institutes and universities in
thedeveloped anddeveloping world.
Itmustbepointed outthatsomeverysafeandeffective vaccinesalreadydeveloped havenot
had the impact that they were intended to have, and although the cause of the failure
generally lieswiththedistribution anddelivery mechanisms,thiscanbe addressed in some
cases by research into enhancing thequalities of thevaccines themselves. Oneexample is
the rinderpest tissue culture vaccine, shown tobe highly effective, but requiring a fairly
strictcoldchaintomaintainitsefficacy. Efforts torenderthevaccinelessthermolabile while
maintaining efficacy havehadaconsiderable influence onimproving thedelivery of potent
vaccine to inaccessible and climatically inhospitable regions, thus enhancing rinderpest
prevention andcontrol inAfrica (Mariner etal., 1990).Another example israbies tissue
culture vaccines,which have effectively controlled canine rabies in those countries of the
developed worldinwhichthediseaseisendemic.Attempts arenowbeing madetodevelop
oralrabiesvaccinesfordogssimilartothosedeveloped for European fox populations (Perry
etal, 1988),toenhance theeffective immunization of dogsinAfrica and elsewhere in the
developingworldwherevaccinationprogramsusingtraditional injectable vaccineshavenot
achieved the levels of coverage and population immunity required to control the disease
(Perry &Wandeler, 1993).
Inthecaseswhere diseasecontrol technologies doexist,theirmanufacture and distribution
inAfrica isfar from optimal,andinfluenced bymanyeconomic andpolitical factors. Since
theearlydecadesofthiscentury,manyproducts,intermsofdrugsandchemicals,havebeen
importedfrom thedeveloped world,andthishaspresented problemsofirregular availability
andlowaffordability. Aslocalcurrencieshaveprogressively declined invalue,and foreign
exchange has become a scarce commodity, disease control programs based on imported
212
products,such as tick-borne disease control through the use of acaricides, have become
increasingly unsustainable economically. As far as vaccines areconcerned, there hasbeen
a serious attempt toproduce them locally, and the bacterial vaccines against blackleg,
anthrax and haemorrhagic septicaemia, for example, are produced in many African
countries.Following independence, this process oflocal production was intensified, and
Africa isnowalmost overendowed withvaccineproduction units.However,manyofthese
have suffered from technical difficulties resulting in variable or low quality products.For
example,manycountriessetupproductionofrabiesvaccines,butseveralhaveexperienced
difficulties in sustaining their output and quality control, while at the same time more
efficacious andmuchcheaper vaccineswerebecomingavailable worldwide from alimited
number of commercial producers in the developed world. On face value, these latter
products made economic sense, but the decision as to whether to buy international or
produce vaccinelocally wasoften complicated by otherissues, such asthe political desire
to enhance national capacity and create employment opportunities. This situation has
changed over thepast few years with structural adjustment programs, and local currencies
arenow freely convertible on the foreign exchange markets in many African countries.If
this trend continues, it will promote the prospect for more regional and international
cooperation in vaccine manufacture and marketing, and enhance the prospect for more
economic efficiency inthepharmaceutical industries ofthedeveloping world.
16.4 Methods to deliver technologies and knowledge

African veterinary services, dominated by thecontrol of infectious diseases since their
inception atthebeginning of this century,have traditionally been centralized and largely
runbygovernments.Inthefirsthalfof thecentury,theywerepredominantlyconcernedwith
theinfectious diseases affecting thecommercial farming sector, aswellasproviding 'fire-
engine' services to the peasant sector. Following independence, while maintaining a
centralizedgovernment-run service,thesystemexperienced astrongchangeof emphasisin
the target clients,from thecommercial tothepeasant and 'emerging commercial' farmers,
andwithservicesdeliveredtothesegroupsfree ofcharge.Insomecountries,suchasZambia
andMozambique,anetworkofstateranchesanddairyfarmsdeveloped,alsothe beneficiary
of government veterinary services. In general, there has been a gradual decline over
subsequentyearsintheabilityofgovernmentstoeffectively deliverveterinary services,and
thepast decade orsohasseenmany attemptstointroduce varyingdegreesof cost recovery
as away tomaintain thegovernment service.Thesehavegenerally notbeen effective. A
notable exception tothedecline incontrol of infectious diseases hasbeen the successful
control ofrinderpest throughout much ofAfrica, but thishasbeen theresult of substantial
donor support over several years. Africa has had few successes in the area of disease
eradication. Thefirstonalargescalewastheeradication ofEastCoast fever from muchof
the southern part of thecontinent, achieved between 1917(when southern Mozambique
was declared free) and 1960 (when Swaziland became the last country of the region to
eradicate thedisease (Lawrence, 1992;Perry &Young, 1993).The success isput down to
highly effective veterinary services supported bylegislation which wasstrictly enforced.
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In the mid-1960s, acampaign was mounted to attempt theeradication of rinderpest from

Africa, named Joint Project 15(JP15).It started inWest Africa, and extended eastwards,
vaccinatingcattleannually forthreeyearsthroughamassiveoperationrunonmilitarylines,
conducted with the assistance of large teams of expatriate veterinarians and funded by
several donor agencies. The follow-up vaccination of calves was left to government
veterinary services tocarry out,butmany countries could notcope.Thus despite such an
heroic effort, the disease re-emerged in the late 1970s and once again spread across the
continent.Anewcampaignwasdevisedandinitiatedin 1986,thePanAfrican Rinderpest
Campaign (PARC),butthis time themethodology wasless spectacular, and it included a
strongcomponentofstrengtheningnationalveterinary services,sothatshouldthecampaign
notbe 100%in any area,the local veterinary service wouldhave the capacity to limit the
spread of any outbreak. Despite the apparent success of this second attempt, massive
amounts ofexternal aidhave againbeen requiredtoachievethis.Andwearenotquiteout
of the woodsyet, with the diseasepersisting in areas of Ethiopia and Sudan where large
cattlepopulationsexist inregions affected bycivil strife.
What isthefuture of veterinary services in Africa? Several authorshavedebated the issue
(Anteneh, 1983,1985;DeHaan&Nissen, 1985;Leonard, 1987;DeHaan&Bekure,1991;
Schillhorn van Veen &De Haan, 1994),but changes are slow to occur. There is general
acceptanceoftheneedtomakeveterinary servicesfinancially self-sustaining, andaspartof
this,to shareresponsibility for diseasecontrolbetween thepublic andprivate sectors,with
the relative contributions of each sector dependent upon the significance of the disease in
question, andthetypeofcontrolmeasuresrequired.DeHaan&Nissen(1985) differentiate
veterinary activities as to whether they are in the public or the private good, whereas
Leonard (1987) seesthepublic sector runningpreventive measures, andtheprivate sector
runningcurativemeasures.The situationisbelievedtobemuchmorecomplicated.Inbroad
terms, the future requirements of government veterinary services will be progressively
focused on diseases: (1)that affect international trade in livestock and livestock products
(such asfoot-and-mouth disease,rinderpest, contagious bovinepleuropneumonia, (2) that
affect public health (such as brucellosis, rabies, Rift Valley fever), (3) that require
coordinated large-scale operations inorder tobe effective (such astsetse-fly control),and
(4)thataffect resource-poor communities orgeographical areas.
Sowhotakesresponsibility fortick-borne diseasecontrol,giventhattheseinfections donot
clearlyfall intothefirstthreecategories? Untilsuchtimeastheprivatesectorcancopewith
the technicalities of tick-borne disease control, and farmers are willing to pay for the
servicesprovided, itisenvisagedthattherewillbeaneedforbroad-scale(such asnational)
planningoftick-bornediseasecontrolthatwillrequirestandardmethodologiestodetermine
their relative importance,both for appropriate resource allocation and for control strategy
development. Thus some public sector involvement for the foreseeable future seems
unavoidable.
Theneedfortheprivatesector,inotherwordsthefarmers,topayfor servicestoinvestigate,
treat andcontrol thosediseases whichlimittheproductivity of their livestock, isclear and
recognized. This differs from Leonard's (1987) concept that only curative (but not
214
preventive) measures areintheprivate good, but isconsistent with the suggestions of De

Haan and colleagues.Theproblem liesin making this work in the developing smallholder
farming sector, where farmers areeconomically constrained. In some areas such farmers
keep only one or twoimproved cattle,lacking as individuals the critical mass to attract
private veterinary services.Inthe areas of eastern Africa where smallholder dairying isan
important component of themixed farming systems,it iseasy toenvisage that the farmers
societies and dairy cooperatives could play acentral role in providing the resources to
employ veterinary staff, andtodeliver effectively awide range of services. However, this
is not soeasy toenvisage elsewhere, such as in areas of central Zambia or the communal
lands of Zimbabwe for example, where milk plays amuch smaller role,cattle have more
traditionalvalue,andtheirstrongest economicroleisintraction forploughing. Regrettably
there is little tradition for private employment of qualified veterinarians to serve these
farming communities, soin many areas the continued use of the government veterinary
department infrastructures, but with afull cost recovery for such services provided, will
probably be acompromise transition for manyyears.
16.5 Successful adoption and useof control measures by farmers

Mounting centrally-planned diseasecontrol programs isonething,but having farmers and
livestock owners comply withinstructions and procedures can be another. Nevertheless,
successful adoption and useof control measures by farmers iscritical toboth public and
private sectorinstigated programsiflivestockproduction efficiency istobeenhanced.
Forpublic sectorinitiatives,thisneedfor agreaterunderstanding of factors affecting farmer
compliancehasreceivedlittleattentioninthepast,andveterinary authoritieshaveoften been
insensitive totheneed for information andunderstanding about diseasecontrol programson
thepart of thegeneral public.Thefirst PanAfrican rinderpest eradication program (JP15)
experienced resistancetovaccination insomeareasbecausethebenefits tothe community
from freedom ofthediseasewerenotadequately explained.ThemorerecentPARCprogram
hasalargeinformation dissemination component toaddressthis.Therearesimilar examples
withotherdiseases.Perry etal. (1995)demonstrated thatdograbiesvaccination coveragein
highpopulation density city suburbscouldbeenhanced considerably ifmoretime was spent
ineachareacoveredbyvaccinationteams,ifchildren(theguardiansandcompanionsofmuch
ofthedogpopulation)wereinvolvedinthevaccinationcampaignduringtheirschoolholidays,
andifhousetohousevisitsweremadeinaddition tothetraditional vaccinationpoints.
Education ofthepublic isparticularly important wherechanges incontrol strategy orpolicy
are implemented. In Zimbabwe, the Veterinary Department has abandoned its policy of
intensive tickcontrol of cattleintheCommunal Landstocontrol tick-borne diseases,andis
moving towards asituation of widespread natural immunity tomany tick-borne infections
through endemic stability. However, itisproving very difficulty tochange the attitudes of
people,boththestockownersandthestaff oftheVeterinaryDepartment,whohaveforalmost
fourgenerationsbeenwarnedoftheevilsassociatedwithticks,andwhonowarebeingtoldof
thebenefits oflivinginharmonywiththem.
Some work has been done to try and better understand local indigenous knowledge of
215
Chapter 16
diseases in order to structure appropriately the message to the public accompanying disease
control programs. Such ethnoveterinary studies have been carried out in Kenya on cattle
diseases (Delehanty, 1991).It is likely that this subject work will become more important as
public support to and adoption of programs play a greater role, and legislation becomes
increasingly difficult to enforce.
With the decline in government veterinary services, attention has been paid to the role of
community-based disease control programs for some of Africa's infectious diseases, and
the most notable example has been control of tsetse flies and the trypanosome infections
they transmit. Some argue that tsetse fly control requires central planning and
implementation to be effective, and Zimbabwe provides an excellent example of how such
an approach can work. However, not every country has the veterinary infrastructure of
Zimbabwe, and community-based programs using odour-baited targets and traps have
been studied in many countries. Probably the most successful example has been at
Nguruman in Kenya (Dransfield et al., 1991), where a community-managed control
program based on local production, maintenance and deployment of insecticide-
impregnated targets was established, financed by the commercialization of wildlife and
handicrafts by the Maasai occupiers of group ranches. However, the sustainability of such
operations without donor support and funded technical advice is still questioned.
Nevertheless, the prospect of greater involvement of communities in disease control
programs presents yet a further opportunity for improved disease control in developing
countries.
References
Anteneh, A., 1983.Financing animal health services in some African countries. International
Livestock Centre for Africa. LPUWorking Paper No.1. Addis Ababa.
Anteneh, A., 1985.Financing livestock service in some countries of East and southern Africa.
International Livestock Centre for Africa. LPUWorking Paper No.6.Addis Ababa.
Deem,S.L.,Perry,B.D.,Katende,J.M.,McDermott,J.J.,Mahan,S.M., Maloo,S.H., Morzaria, S.R,

Musoke, A.J. &Rowlands, G.J., 1993.Variations in prevalence rates of tick-borne diseases in
Zebu cattle by agroecological zone: implications for East Coast fever immunization. Preventive
Veterinary Medicine 16:171-187.
DeHaan,C.&Bekure,S., 1991.Animal health services insub-Saharan Africa. Initial experiences

with new approaches.TheWorld Bank, Washington, D.C.
De Haan,C.&Nissen,N.J., 1985.Animal health services in sub-Saharan Africa. TheWorld Bank.

Technical paper No.44F.Washington, D.C.
216
Diseasecontrol programs indevelopingcountries:prospectsandconstraints
Delehanty,J., 1991.Localknowledgeofcattlediseases:methods andresultsfrom astudy in coastal

Kenya.In:Ethnoveterinary Research andDevelopment (CM.McCorkle&E.Mathias-Mundy,eds),
Kegan Paul International, London.
Dransfield, R., Williams,B.G. &Brightwell, R., 1991.Control of tsetse flies and trypanosomiasis:
myth orreality.Parasitology Today 7: 287-291.
FAO, 1995.Report of an expert consultation on the need for information systems to strengthen
veterinary services in developing countries,Rome.
Gitau, G.K., McDermott, J.J., Waltner-Toews,D.,Lissemore, K.D., Osumo, J.M. &Muriuki, D.,
1994.Factorsinfluencing calfmorbidity andmortality insmallholderdairyfarms inKiambu District
of Kenya.Preventive Veterinary Medicine 21: 167-177.
Lawrence,J.A., 1992.History ofbovine theileriosis in southern Africa. In:The Epidemiology of

Theileriosis in Africa, R.A.I.Norval,B.D.Perry &A.S.Young, Academic Press,London: 1-39.
Leonard, D.K., 1987. The supply of veterinary services: Kenyan lessons. Agricultural
Administration and Extension 26:219-236.
Mariner, J.C, House, J.A., Sollod, A.E., Stem, E., Van den Ende, M.C. &Mebus, CA., 1990.
Comparison of the effect of various chemical stabilizers and lyophilization cycles on the
thermostability of a Verocell-adapted rinderpest vaccine.Journal of Veterinary Microbiology 21:
95-209.
Perry, B.D. & Wandeler, A.I., 1993.The delivery of oral rabies vaccines to dogs: an African
perspective.Onderstepoort Journal of Veterinary Research 60:451-457.
Perry, B.D. &Young, A.S., 1993.The naming game: The changing fortunes of East Coast fever
andTheileriaparva.Veterinary Record 133: 613-616.
Perry,B.D.,Brooks,R.,Foggin,CM., Bleakley,J.,Johnston,D.H.&Hill,F.W.G., 1988.Abaiting

system suitable for thedelivery of oral rabies vaccine todog populations in Zimbabwe. Veterinary
Record 123: 76-79.
Perry, B.D., Kyendo, T.M., Mbugua, S.W., Price, J.E. & Varma, S., 1995. Increasing rabies
vaccination coverage inurban dogpopulations of high human population density suburbs: acase
study in Nairobi, Kenya.Preventive Veterinary Medicine 22: 137-142.
Schillhorn van Veen, T.W. &De Haan, C , 1994.New trends in the organisation and financing of
livestock and animal health services.The KenyaVeterinarian 18:24-25.
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Van Schaik, G., Perry, B.D., Mukhebi, W.A., Gitau, G.K., Dijkhuizen, A.A., 1995.An economic
analysis of smallholder dairy farms in Murang'a District, Kenya. Proceedings of the 8th
International Conference of Institutions ofTropical Veterinary Medicine, Berlin, 76.
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17
Howdowe integrateeconomicsintothepolicy
development andimplementationprocess?
A.D. James
Veterinary Epidemiology and Economic ResearchUnit, University of Reading, Reading, UK
Objectives
• animal healthbeing only oneconstraint affecting livestock production systems
• factors that influence cost recovery for animalhealth services
• the importance of anintegrated approach inlivestock development programs
17.1 Introduction
This chapter is intended to describe applications for the various economic techniques in
the process of planning and implementing animal health programs. The most important
point is that animal health economics cannot beconsidered in isolation when it comes to
formulating and implementing development policy. Animal health is only one of the
constraints affecting livestocksystems,anditisnotusually sufficient toaddressonlyanimal
health constraints: otherproblems mayprevent potential benefits of improved health from
being realized.
It must also be emphasized that the situation is dynamic: removing an animal health
constraint may result in fundamental changes to production systems (eg,the adoption of
different livestock breeds). The new production systems will face a new range of
constraints,including newdisease problems.
These points may seem obvious, but far too many animal health (and other livestock
development) programshavefailed becausetheywerebasedoninadequatepolicy analysis,
especially in the developing world. Anotable exception is the 'Operation Flood' milk
cooperative movement in India, and it is significant that these programs have provided
interventions in milk marketing, health, breeding, nutrition, credit and management
advisory services.
Integrated livestock development programs, based on an understanding of the whole
production system,have longbeen recognized as necessary. However, such programs are
complex toplan andtomanage,andthefailure ofonecomponent canjeopardize the whole
effort. However, the standard economic methods are compatible with the systems-level
approach, andthere areencouraging signsthat theiruseisbeginning tohave an impact.
Itmust alsoberemembered that livestock have alongproduction cycle, and it takes time
fortheeffect ofimprovementstomanifest themselvesasincreasedproductivity andincomes.
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Chapter 17
The impact of many livestock development projects will notbe apparent until some years
after theend of theproject (which mayhave been terminated because nobenefits could be
demonstrated).
Many developing countries have been unable to implement livestock development
programs which have been shown to be economically justified, because they lack the
services to implement and sustain the necessary activities. The reason for the lack of
services is almost always lack of finance to operate them (lack of trained personnel is
usually only a secondary problem: even if the staff were available, they could not be
financed). Infact, acommonproblemisthat althoughbudgetsmay actuallyhaveincreased
in real terms, staff costs have steadily risen sothat nearly all of the budget is used topay
(usuallyinadequate) salaries.
There arethree approaches todealing withthis situation:
• retrenchment, inwhich staff numbers aredrastically reduced;
• privatization,inwhich services aretransferred totheprivate sector;and
• cost recovery, when producers paydirectly for government services.
These approaches are not independent of each other, and most countries adopt a policy
containing elements ofallthree.Thishasledto someconfusion inthe analysis of different
policies.Cost recovery has important economic implications, because it directly affects
the decisions and economic welfare ofproducers.There hasbeen extensive debate on the
suitability ofcostrecovery for different services,andthe subject isreviewed as follows.
17.2 Cost recovery for animal health services
17.2.1 Arguments for and against

Thequestion ofcostrecovery needstobedistinguished from tworelated issueswithwhich
it is often confused: privatization of veterinary services andtheestablishment of revolving
funds. Private veterinary practitioners maybe engaged toimplement government-financed
disease control programs without any cost recovery from livestock owners.This has been
standard practice in many countries, and has been used toprovide work and income for
private veterinary practices while theybecome established. Further argumentsinfavour of
theuseofprivate veterinarians ingovernment programs arethat itmayreduce costs ifthe
private sector can operate more efficiently than government, and that it places the
government serviceinitsproper function of regulation and supervision, separating these
activities from implementation with which they are incompatible. However, the use of
privateveterinary practitioners couldreduce scopeforcostrecovery ingovernment disease
control programs: private veterinarians may be reluctant to compromise their relations
with clients by acting as 'tax collectors'.
Revolvingfunds inwhichtherevenuefrom costrecoveryismadeimmediately available for
continued operation of theprogram areoften proposed as apart of cost-recovery schemes.
However, they are not an essential component, and are generally opposed by finance
ministries on the grounds that they are expensive to administer, increase the risk of
220
How do we integrate economics into the policy development and implementation process?
misappropriation and make financial planning more difficult. If revenues are less than
expected, aprogram financed by arevolving fund maycollapse while, in theory at least,
finance allocated from thecentralgovernmentbudgetshouldbeavailableirrespectiveofthe
success of cost recovery.
The arguments for and againstcostrecovery fall intosixmainheadings:
• Sustainability -cost recovery may be considered amore reliable source of finance for
veterinary servicesthan thecentral government budget insomecountries;
• Equity -itmay be argued that beneficiaries of aservice should meet the cost of providing
it;
• Efficiency of resourceallocation -if aservice isprovided atlessthan itseconomic costit
may be applied at alevel higher than the economic optimum; alternatively, it may be the
casethat aservice given for nothing maybe valued atnothing and ignored;
• Effectiveness of disease control -cost recovery in adisease control program would be
expectedtoreducethecoverage,whichmightexposeeventreated animalstoahigh disease
challenge,reducing theeffectiveness andeconomicbenefits of thewhole program;
• Economic cost of cost recovery -ineconomic terms,cost recovery merely transfers the
costs of adisease control program from one sector of the economy to another, and does
notgenerate anybenefit totheeconomy asawhole;onthecontrary,itaddstotheeconomic
cost of theprogram;and
• Financial efficiency -collecting fees from livestock owners can be very difficult and
expensive, especially where the treatment cannot be withheld from those unable to pay
immediately. It may bethe case that the financial cost of collecting the revenue is greater
than therevenue itself,meaning that thereisanadverseeffect ongovernment expenditure.
All of these considerations should be included when deciding whether or not cost recovery
is appropriate for aparticular program. The final decision will depend on weighing the
advantages and disadvantages, andthiswillcertainly involve adegree of subjective value
judgment. However,betterdecisionscanbeexpected if alloftheissueshavebeen taken into
account. Theissuestobeconsidered arediscussed inmoredetail inthefollowing sections.
17.2.2 Sustainability
This is usually the principal practical argument in favour of cost recovery for veterinary
services. The operational capacity of many government veterinary services has been
crippled by lack of funding. The attractions of alleviating this problem by collecting
revenuesfrom livestockownersareobvious.Totheveterinary servicesstaff itcouldprovide
a more reliable source of funding to sustain disease control operations, and to the finance
ministry itwould offer arelatively painless way of increasing government revenue and/or
reducing budget deficits. Theresult would betoprovide sustainable long-term funding for
diseasecontroloperations,withoutimposingadditionaldemandsonthecentral government
budget.
Lack of operational funding maybeduetoany combination of threecauses:
• thatbudgetary allocations areinsufficient tomaintain theservices required;
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Chapter17
that planned budgetary allocations are not actually available for expenditure because of
economic conditions oradministrative problems;or
that an excessive proportion of the funding made available to the veterinary service is
absorbed byadministrative andoverheadcosts,particularly manpower,leaving insufficient
funding for field operations.
The last problem is avery common result of previous shortages of operational funding.
When activitieshavetobecurtailed,itisusuallyfieldoperations that arereduced, asinthe
short term this is the only feasible method of reducing expenditure. Torestructure the
veterinary service would requirereducing facilities and/orreducing staff numbers,both of
which take time to implement and have political implications. It is also the case that
decisions on the allocation of resources tend tobe made by headquarters staff, and these
arenaturally reluctant todeclare themselves redundant. However, cost-recovery programs
areunlikely toprovide asolutiontothisproblem.Ifrestructuring ofthe serviceisrequired,
this difficult problem must eventually be faced. Otherwise increased funding, from any
source,islikely tobe absorbed infurther administrative and overhead costs.
Assumingtheinstitutionalstructureoftheveterinary serviceisreasonable,thenincreasesin
funding from cost recovery have the potential to sustain field operations. However, cost
recovery may not actually result in anincrease inavailable funding. The finance ministry
maysimplyreducefunding from thecentralgovernmentbudgettooffset anyrevenues from
costrecovery.This mighthave abeneficial effect onthecentral government budget deficit,
butclearly willnotcontribute toimproving veterinary services.
If there is a problem of planned budgetary allocations not actually being available for
expenditure duetoeconomic conditions oradministrative problems,then costrecovery by
itself is unlikely to help the situation. In thesecircumstances any revenues collected are
likely to remain in the finance ministry, subject to the same financial restrictions or
administrative constraints asanyothersourceoffunding. Theestablishment ofarevolving
fund, so that revenues remain within the veterinary department and can be used to fund
programs directly, can helpto overcome administrative problems inthe disbursement of
funding. However, if the administrative barriers are in fact an instrument of government
policy intended torestrict expenditure, suchrevolving funds are likely tobe opposed by
thefinanceministry asthey tend toundermine thispolicy. It is also thecase that revolving
funds require careful administration and audit, which will add to costs and probably
duplicate systemsalready inexistence inthefinanceministry.Even if arevolving fund can
be established and successfully operated, it may not guarantee the sustainability of
programs.Ifforanyreasonshort-termrevenuesarelowerthananticipated,forexampledue
to anatural disaster suchasflooding ordrought, then programs financed by the revolving
fund may becurtailed bylackoffunds attheverymomentwhenthey aremost needed.
In summary,cost recovery doeshavethepotential toprovide funding on along-term basis
for some disease control operations. It is not,however, asubstitute for restructuring the
veterinary service where this is necessary. Where revenues are channelled through the
finance ministry there is adanger that they will beregarded simply as another source of
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How dowe integrate economics into the policy development and implementation process?
revenue from taxation. Revolving funds require considerable administrative inputs and
auditing, andmay notcompletely cushion programs from short-termfinancialadversity.
17.2.3 Equity
There is astrong argument for theprinciple that the beneficiaries of aservice should meet
the cost of providing it. It is,however, amistake to assume that livestock producers asa
group arenecessarily the primebeneficiaries of improved livestock disease control.In the
first place,control of livestock diseases maybemotivated, atleastinpart,by the objective
of protecting human health. Second, itcan be shown that technological improvements in
livestock production often enhance the economic welfare of consumers more than
producers.
The control of zoonotic diseases is frequently undertaken with aview more to protecting
publichealththantoimprovelivestockproductivity.Forexample,theprimemotivation for
the control of brucellosis is usually to protect humans from the disease. While farmers,
veterinarians and others working in the livestock industry are most exposed to zoonotic
diseases,thegeneralpublicandconsumersoflivestockproductsareusually alsoatrisk,and
their greater numbersmay mean that they account for themajority ofhumancases.
Where adisease affects livestock productivity, reducing the incidence would increase the
levelofproduction.The increased production canbe expected toreduceprices,and onthe
markets for many agricultural products thepercentageprice reduction can be greater than
the percentage increase in production. For example, a5% increase in production could
lead to a 10%fall in prices, which would mean that producers would actually suffer a
reduction of income, while consumers would receive more product for less total
expenditure. This is by no means the case for every market, but it is quite a common
situationinthemarketsfor agriculturalproduce,andisthemainjustification for agricultural
supportpolicies.Itgenerally occurswherethedemand for aproduct isrelatively insensitive
toprice,asisoften thecase for staple food products (see alsoChapter 12).
Econometric analysisisrequiredtoidentify thebeneficiaries oftechnological improvement
inanyparticularmarket.However,itisquitecommoninthemarketsforlivestock products
that consumers would be the main beneficiaries, especially as international markets for
livestock products arelimited byzoosanitary restrictions.
It should be pointed out that thelivestock owner alsoconsumes someof the production in
most livestock systems, but in the extreme case of subsistence livestock production the
low income of theowners mayconstitute anargument for government support. Itisinany
case difficult tocollect fees from subsistence producers.
Where the main beneficiaries of disease control are consumers rather than producers, it
would be equitable to impose the cost of disease control on consumers. This might be
achieved through the imposition of atax orcess onmarketed livestock production, but in
many developing countries themarkets for livestock products aredispersed and informal.
Any attempt totax the formal markets, which already have higher costs because of meat
inspection and other measures, would simply encourage more marketing through
uncontrolled channels.The practical,but less focused, policy maybe toraise the revenue
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Chapter 17
through general taxation, which usually affects consumers oflivestock products morethan
producers.
There is a further twist to the economic welfare argument: while it may be against the
economic interest of producers as agroup to adopt improved technology, the situation is
different for individual producers. If an individual uses disease control to improve the
efficiency of production, it will make no measurable difference to the price that (s)he
receives.Therefore itwillbeinthepersonalinteresttoapplydiseasecontrol,eventhoughit
is against the interest of producers as a group. The divergence of individual and group
interests may mean that it is in theinterests of theindividual topay fees,but this does not
necessarily mean that itisequitable.
This discussion has so far omitted another aspect of equity, which is the principle that
taxation should be directed at the wealthy.This chapter isconcerned with the problems of
cost recovery rather thanthe redistribution of wealth, and therearemore efficient methods
forredistribution ofwealththanchargingfeesfor services.Thepointdoes,however,suggest
the possibility of restricting charges for services tolarge-scale livestock producers. This
group are more likely tobe able topay fees, and larger, more intensive producers benefit
more from some disease control programs than small-scale producers. The practical
difficulty with thepolicy is to identify criteria for deciding whether aparticular producer
should pay fees ornot.
In summary, it is a mistake to assume that livestock owners are always the main
beneficiaries of disease control programs. While it may be in theinterest of individual
producerstocontrollivestockdiseases,producers asagroupoften suffer alossofeconomic
welfare compared withconsumers oflivestockproducts.Whileitmaybemorepractical to
recover thecost of services from producers, itisnotnecessarily equitable.
17.2.4Efficiency of resource allocation

In thetheory ofproduction, inputs shouldbe applied tothepoint where themarginal value
of the additional production obtained from the use of the input is equal tothe marginal
costoftheinput (seealsoChapter2).Assumingdiminishingreturnstohigherlevelsofinput
usage,applyingmoreinputbelowthisoptimal levelwouldproduceadditionalproductionof
greater value than the marginal cost of the input, while if the input wasbeing used ata
higher levelthan theoptimum, themarginal value product would beless than the marginal
cost.
The consequence of thistheory isthat if the producer were supplied with the input free of
charge,there would be noeconomic constraint tothe level of usage,and it would tend to
beover-applied andthuswasted.Forexample,ifproducerswereabletoobtain anthelmintic
free of charge, they might tend touseit at higher doses ormore frequently than necessary,
thuswasting resources.
A contradictory theory sometimes advanced is that if a service is available at no cost,
producers mayregarditasbeingofnovalue andthusdisregard it.However, itisdifficult to
find convincing evidence in support of this: there do not seem to be any documented
examples ofuptake ofdisease control measuresbeingimproved bytheintroduction of fees.
224
Thus, producers could be expected to apply disease control at the economically optimal
level,but only if four conditions weremet:
thedecision onthelevel of diseasecontrol would have tobe within their control;
they would havetobe aware of theproduction response to any particular level of disease
control;
they would havetoreceive thebenefit of any production response;and
they would have tomeet thecost of thetreatment.
If any of these assumptions fail, then producers cannot berelied upon to apply the optimal
level of disease control.Itisnotsufficient tomeet only thefourth condition, cost recovery,
toensure theoptimal allocation ofresources.
Thefirstcondition doesnot hold for all types of disease control.Many epizootic diseases
canonlyeffectively becontrolledbymassvaccination andothermeasures,suchasslaughter
andmovementcontrol,appliedonaregionalornationalbasis.Inthiscasetheproducerdoes
notmakethedecision onthelevelofcontrol.Ontheotherhand,someanimal health inputs
such asparasite control measurescanbeusedeffectively byindividual producers, whocan
make the decision onthe level of control.There is astrong case for imposing the cost of
disease control at the decision-making level, which may or may not be the individual
producer.Toreversethewell-known proverb:"hewhocallsthetuneshouldpaythe piper"!
The second condition is amatter of theexperience of individual producers and extension
workerstomakethemawareofresearchresults.However,withregardtoepizooticdiseases,
the individual producers face agreat deal of risk and uncertainty. If their herd is affected
by thediseasetheymayface very largelosses,butthey mayescape infection altogether.In
such situations theelement of risk is much less important at the regional or national level
where average losses are more predictable. Therefore it is easier to assess production
response tothecontrol of epizootic diseases attheregional or national level,and thus to
makerational decisionsontheappropriate level ofcontrol.
The third condition, that the producer receives thebenefit of any production response, is
more likely to apply atthe level of the individual producer than for producers as agroup,
as explained in the previous section. However, there are frequently external costs and
benefits, ie,costs andbenefits which apply topersons other than the individual producer,
in animal disease control.Much of thebenefit of controlling zoonotic disease may accrue
tothepublic andconsumers of livestock products, and in thiscase producers could not be
relied upon toadopttheoptimum level ofcontrol.Externalities areoften significant inthe
controlofinfectious diseases.Itcanbethecasethatdiseasescauselittlelossinthelivestock
populations which act asreservoirs of infection, but large losses when they are introduced
to other susceptible populations which cannot always be protected by vaccination. To
control such diseases it is necessary to apply control measures in the maintenance
population, where there ismuch less incentive for livestock owners to meet the costs of
control.
In summary,therefore, costrecoverycansometimesbeexpected tolead tomoreeconomic
application ofanimalhealth inputs,butonlyifthedecision isinthehandsof theproducers;
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Chapter 17
they areaware of thebenefits andthey aretherecipients of the benefits. These conditions

are likely to be met for the control of many parasitic conditions and other diseases of
relatively low infectivity, butnot for highly infectious orzoonoticdiseases.
17.2.5 Effectiveness of disease control

The effective control of many infectious diseases requires high levels of participation in
the disease control program. Any attempt to recover the costs of control will reduce the
willingness of livestock owners to cooperate, which will have an adverse effect on the
economic value of theprogram,eitherby increasing costsor reducing benefits.
Thisprinciple isvery important inthecontrol of diseases such as foot-and-mouth disease,
where it is difficult toprotect animals by vaccination in the face of continuing disease
challenge.Itis also significant inthecontrol of diseases such asrinderpest where a single
vaccination confers life-long immunity. In this case, it may be possible to eradicate the
disease ifhighvaccination rates canbemaintained for afew years;thereafter control costs
willberestricted topreventingre-infection. Ontheotherhand,itmaybe possible to avoid
mostofthelossfromrinderpestbycontinuinglowerratesofvaccination indefinitely,butthe
overall costs of this are likely tobe much higher. Moreover, the continuing presence of
infection may lead torestrictionson internal and international trade,both of which have
economiccosts(seealsoChapter 12).
Again, this consideration is of greatest importance in the control of highly-infectious
diseases,andisoflesssignificance for conditions oflowerinfectivity where theactionsof
oneproducerhavelessimpact onothers.
17.2.6 Economic costof cost recovery

Cost recovery can neverreduce the cost of disease control for theeconomy asawhole.
Thechargingoffees forservicessimplytransfers thecostoftheprogramfrom onesectorof
theeconomy toanother. Onthecontrary, costrecovery adds tothe overall economic cost
ofadiseasecontrolprogram.Itwillrequiretime,resourcesandadministrationtocollectand
account for thefees, and itmaybemore difficult and expensive toensurethatanimals are
vaccinated ifownersareawarethatfees aretobecollected.Iftheprogressofdiseasecontrol
operations isdelayed bythe collection of fees,then theeconomicbenefits willbe reduced
asthediseaselosses continue.
17.2.7 Financial efficiency

Oneofthemain objectives ofcostrecoveryistoreducethefinancialcostofdiseasecontrol
programstogovernmentbudgets.However,theresourcesusedincostrecovery havealsoto
befinanced,anditisquitepossiblethatthebudgetary costoftheseresourcescould approach
orexceed the revenue generated. Thefinancialcost of cost recovery will include not only
the staff and resources required to collect the fees, but also any increased costs resulting
from theslowerimplementation ofprogramswhichislikelytoresultfrom theimpositionof
fees.
The cost of collecting fees will depend on the nature of the disease control program.
226
Ifparticipation isvoluntary, then the service canbe withheld from owners who are unable
or unwilling to pay the fee. In this case, the costs will consist mainly of the extra
administration required tohandle and account for therevenue.In addition, some programs
carry overhead costs, eg, travelling to villages, in addition to the direct costs of the
treatment. If thecharging of fees reduces participation, then theoverhead costsper animal
treated maybe increased.
If owners cannot pay the fee at the time of treatment incompulsory programs, it will be
necessary either toextend creditby agreeing tocollect thefee later,ortoreturn totreat the
animals at some later date.Both of these options are inconvenient and expensive. In the
last resort they will require police action and recourse tocivil or criminal courts. Such
measures are unpopular with livestock owners, veterinarians and police, and extremely
expensive.
In some circumstances it maybe possible torely uponthe local administration, eg,village
headmen, tocollect fees. This can substantially reduce thecost of collection, but is very
difficult tocontrol and subject toabuse.
17.2.8 Resolving the cost-recovery issue

Costrecovery forveterinary servicesisaverycomplexquestion,andthereisnogeneralrule
as to whether it is desirable or practicable. However, having reviewed the main issues
involved, it ispossible toproduce some general guidelines. Itisclear thatno government
can afford toprovide all possible animal health services free of charge, and that even if
thiswere feasible it would lead toenormouswastage of resources.Apolicy inwhich each
producer could decide on what level of animal disease control was appropriate to his/her
circumstances and meet thecosts would be equally impractical, asmany diseases require
organized control programs onaregional,national orinternational scale.
Inthecontrol of diseases of relatively lowinfectivity andwhichdonothavehuman health
implications,most of incremental production and otherbenefits of disease control accrue
tothe individual producer. Their decision on whether to control the disease or not will
have little effect on other people.Inthiscase,if thecosts of control areimposed upon the
producer, (s)he will be motivated touse disease control atthe most economic level.Cost
recovery would therefore tend to lead to rational allocation of resources.This advantage
would usually be considered to outweigh the disadvantages resulting from the cost of
collecting therevenue,and thefact that free andcompulsory programs might have lower
costsper animal treated.
Wheremarketconditions aresuchthatproducersasagroupsuffer alossofwelfare byusing
disease control to increase production, therather paradoxical situation develops that to
subsidize voluntary diseasecontrolprogramswouldactuallyworkagainsttheinterest ofthe
producer! If the program is subsidized, production will increase,resulting in agreater loss
of economic welfare toproducers, aswell asencouraging useofthe animal health input at
levelsbeyond theeconomic optimum for theeconomy asawhole.
In the control of more infectious diseases, or those with human health implications, a
proportion of the benefit of disease control will accrue topeople other than the producer.
227
Chapter 17
Inthiscase,theproducer'soptimallevelofdiseasecontrolmaydiffer from theoptimum for

society as a whole, and it may be necessary to impose a compulsory disease control
program.Toattempttofinance thisbycollecting fees from producers islikely toaddtothe
costs of the program, and reduce its effectiveness andbenefits. Itis also possible that the
costs of collecting thefees will approach orexceed therevenue collected.
Incompulsory diseasecontrol programs,improvedefficiency ofproduction resulting from
thecontrol of diseasemay,in somecircumstances, haveanadverseeffect onthe economic
welfare ofproducers asagroup.Then thejustice ofimposingthecost of theprogram upon
producers is doubtful, butthepractical arguments outlined above arelikely toprevail over
the question of equity,which caninanycase beaddressed in otherways.
Apractical approach to decisions on cost recovery istorequire the individual or agency
making the decision to meet the cost. Any departure from this principle leads almost
inevitably to problems of enforcement or wastage of resources. This implies that
compulsory programs for the control of epizootic and zoonotic diseases should be
government-financed, while other programs and clinical services should be producer-
financed. This leads toa situation inwhich the 'client' of economic analysis, the decision
maker, also hastobearthefinancial andbudgetary implications.
Predict effect on disease Effect of disease on

T
Calculating disease
production control program costs
Epidemiological models
(conceptual & mathematical) Surveys & monitoring Standard budget forecast
Comparing costs & benefits
Social cost-benefit analysis

Sensitivity analysis
I
Program monitoring
Epidemiological monitoring
Production monitoring
Financial recording
Figure 17.1Economic analysisin government financed diseasecontrol programs
17.3 Economic analysis of government-financed disease control programs

Decisions on government-financed disease control programs are usually based on social
cost-benefit analysis(Figure 17.1).Thecostsandbenefits oftheprogramtotheeconomy as
awholearecompared.Thistypeofanalysisismostvaluableforplanningpurposesonanex
ante basis, ie,before the program is implemented. Expost analysis is only of historical
228
Howdowe integrate economicsintothe policydevelopment andimplementation process?
interest,unless itisbeingused topredict theeffects ofextending anexisting program.

Itisusually much easier topredict thecosts of disease control programs than the benefits.
Topredict thebenefits requires knowledge of:
• existing levels of disease and productivity;
• theeffect ofthe program onthedisease;and
• the effect ofthe reduced levelof diseaseon production.
Many of the newer methodsin animal health economics addressthese information needs.
The assessment of existing levels of disease and productivity is an empirical process,
dependingonanalysisofdataproducedbyadhocsurveys,oron-goingmonitoringsystems.
Whileitissometimespossibletocollectuseful information onanimalhealth andproduction
through rapid appraisal 'snapshot' techniques, it is often found that the results of such
surveys arebiased.Themainreasonsfor thisarethat:
• producers' recollection of livestock production and offtake tends tobe unreliable. Unlike
mostcrops,livestock donothave asingleharvest period: offtake canoccur throughout the
year.
• mostlivestock specieshavealongproduction cycle,anditcantakealongtimefor changes
tothepattern of production toworkthrough the system.
• producers have considerable flexibility in short-term management strategies. They may
increase ordecrease offtake rates inresponse tomarket orclimaticconditions.
• many diseases follow long-term cycles (which may be related tocycles in the pattern of
production).
Predictionsoftheeffect oftheprogramonlevelsofdiseaseandofreducedlevelsofdisease
on productivity require theuse of models,which range from informal conceptual models
in the minds of decision makers tomathematical models implemented on computers (see
also Chapters 6 to 9). The models, whether conceptual (qualitative) or mathematical
(quantitative) rely ondata obtained from empirical studies.In general, the availability of
reliabledataisthemostimmediateconstrainttotheincorporation ofeconomicsintoanimal
healthpolicy atthenational level.
17.4 Economic analysis of producer-financed animal health programs

Whereproducers areresponsible for makingdecisionsonanimal health programs for their
own livestock, the decision willbebased oneconomic analyses,inwhich theprices reflect
valuestotheindividual farm situation (usually marketprices).
While many animal health servicesare(orshouldbe)producer-financed, the development
and extension of policies for them to implement is usually seen as a government
responsibility. In general, it is not feasible to conduct individual economic analyses for
individual producers. Analysis isconducted for model situations,representative of groups
of producers, on thebasis that thepolicy produced willbe appropriate for allproducers in
that group (Figure 17.2).This means that expost analysis can play amore important part
in the analysis of producer-financed animal health programs. Before a policy is
229
Chapter 17
Identification and
classification of
production systems
Production &
health data
collection
Surveys & Monitoring

On-farm trials
Analysis of
production systems
Productivity
Budgets
Linear programming
Risk analysis
Extension and Analysis of Research

implementation constraints
Extension materials Production models Research priorities

Model budgets Financial models Experimental design
Finance of services Risk analysis Analysis of results
Figure 17.2Economic analysis in producer-financed health programs
recommended for general application it can be tested in field trials. The results of these
analysesbasedonempiricalstudiesaremorereliable thanthosebasedonpredictive models
(which might havebeen usedtodesign thepolicies for pre-extension trials).
Theuseofcomputer-based herdrecording andmanagement systems doesallow automated
economic analysis of policies for the individual herd. At present, these automated
analyses are based upon the results of studies in other herds,but there is atrend towards
using the records of the individual herd asabasis for theprediction of future performance
ofthat herd.
Inmanydevelopingcountries,livestockproducershaveverylimitedaccesstoanimalhealth
andproduction services,andtheprivatesectoroffers theonlyprospectofproviding services
inthe future. Economic analysis of livestock services inthese situations needs to consider
not only the effect of services for the producer, but also the financial profitability and
viability of providing theservices.
17.5 Economic analysis of research priorities

Withincreasing pressure ongovernment budgets,thereisincreasing demand for economic
analysisoflivestockresearchprograms.Inparticular,sponsorsaredemandingthatresearchbe
prioritizedandresourcesbedirectedtoprogramsthatwillproducethegreatesteconomicreturn.
230
The economic analysis of research is complicated by the fact that the benefits depend on
results,which areby the very nature of research uncertain. It is alsonecessary totake into
account thelikelihoodthatnewtechnologieswillbeadoptedbyproducers:thereisnovalue
in producing a new technology if producers lack the services to use it, or if they find it
socially unacceptable. These problems of probability of success and uptake of results can
only bejudged subjectively, which means that different individuals will produce entirely
different rankings ofresearch priorities.
Theapproachwhichhasbeenmostwidely appliedintheeconomicprioritization ofresearch
programs hasbeen toidentify constraints toproduction systems, and then toestimate the
economic benefit that would result from the removal of the constraint. Weightings are
applied tothisfigure toadjust for probabilitiesof successanduptake,resulting inaranking
of research topics.These then have tobe reviewed in comparison tothe probable cost of
producing atechnological solution totheconstraint.
Even then,theranking isonly tentative,because other factors will alsobe significant. The
research topics are not independent: the success of one technology may depend on the
development of another. There is aneed tomaintain capacity to undertake research in a
broad rangeof disciplines tomeet future needs:if adepartment isclosed down thisyear,it
could takeyears tore-establish the facility in future.
17.6 Institutionalarrangementsfor livestock policyanalysis

Animal health policy isonly onecomponent oflivestock development policy.Much ofthe
information needed for the economic analysis of animal health isthesameasthat required
for the analysis of otheraspectsof livestock production, andtheeconomiceffect of animal
health constraints istotally dependent onthe whole production system. It would beboth
wasteful andineffective tomaintain separate groups of staff responsible for animal health
economics andotherfieldsof livestock economics.
Historically, veterinary services have accounted for a high proportion of livestock
development expenditure in many countries. This has led to more urgent consideration
being given to the economics of animal health than of other aspects of production. The
techniques developed inthe discipline of animal healtheconomics haveproved applicable
totheanalysisof otherconstraints.Indeed,asdiscussed above,techniquesdeveloped forthe
economic analysis of animal health in isolation would be useless. Therefore, the most
important challenge for animal health economists istoproduce policy not only for animal
healthservices,butforlivestockdevelopmentingeneral.Ininstitutionalterms,thisrequires
the development of livestock policy units serving all branches of government livestock
services, aswell astheprivate sector.
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18
Building aspreadsheet model
R.S.Morris1),C.W.Rougoor2) &R.B.M.Huirne2)
1)Department of Veterinary ClinicalSciences, Massey University, PalmerstonNorth, New
Zealand
2)Departmentof Farm Management, WageningenAgricultural University, Wageningen, the
Netherlands
Objectives
Bytheend ofthischapter thereader should beable:
• tounderstand thebasic principles of spreadsheets
• todesign simplespreadsheet models
• toincluderiskfeatures into spreadsheet models
18.1 Introduction
When economic analysis first gained acceptance as adecision-making aid in veterinary
science,everyanalysishadtobeconductedcompletelybyhand-frequently involvinghours
of calculations and double-checking. Since then electronic spreadsheets have made the
task relatively simple even the first time, and even easier to doif the same analysis must
bere-runwithnewdata.
Because repeated financial calculations are very commonly used in business, the
spreadsheet caught on like wildfire over adecade ago,and became amajor factor in the
growth of personal computers. Spreadsheets can bejust asuseful in veterinary work asin
other fields, and this chapter explains the application of thetechnique at various levelsof
sophistication. They offer away for thenovice tofirst develop asimplepartial budget,but
they offer theexpert apowerful shortcuttoconducting complex modelling and analyses.
18.2 Structure of spreadsheets
18.2.1 Cells
Anelectronicspreadsheet consistsofatableofindividual 'cells',mcolumnswidebynrows
deep. Columns areusually designated by letters and rowsby numbers. Acell is therefore
uniquely designatedbyitscolumnletterandrownumber,suchascellB12,whichisthecell
attheintersection ofthesecondcolumn and 12throw.Thewidthofcolumnsmaybevaried
to suit theparticularneeds.
Cells can be allocated toparticular uses.Common uses include text fields for labels of
various kinds, data fields which expect the user to enter values when the spreadsheet is
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Chapter 18
ran, andcalculationfields,whichcontaintheresultsofcalculationsbasedonthedatawhich
areentered.Theuniquefeature of spreadsheets which makesthemsovaluable istheability
toattach acalculation formula toacell, sothat every time anew value isentered in adata
entry field which affects acalculated field, the calculation is carried out again either on
request or(usually) automatically, sothat newvalues appearinallrelevant cellsassoon as
anumber anywhere inthe spreadsheet ischanged.
Theformula for acellcanbeviewedandeditedatwill,makingiteasytocheckitsaccuracy.
Once the formula is checked and permanently stored as part of a particular named
spreadsheet, itcan berelied ontorepeatthecalculation accurately asoften as wished.
This feature differs from adatabase management program, which allows manipulation of
data entered, but usually requires aformula tobe applied to agroup of cells by specific
decision of the user, and does not allow automatic formulae tobe attached to single cells
withcross-references toothercells.
18.2.2 Advanced calculation procedures

The formulae incellscan include all of the standard arithmetic operations,but in addition
avarietyofmoreadvancedoperationswhichallowthespreadsheettoactasafull economic
analysis system. For example, the discounting procedure for cost-benefit analysis is
available asastandard operation whichcanbecalledbyitsnameandapplied toaseriesof
annualcost orbenefitfigurestomake cost-benefit analysiseasy.
Sequences ofcalculationswhichmustbecarriedoutrepeatedly for aparticular application
can be automated by means of arecorded set of steps called amacro. This can be run to
conduct morecomplex analyses than canbe achieved by simply editing data fields in the
spreadsheet. Modern macro languages allow almost full programmability of the
spreadsheet,permittingittodothingsnotenvisagedbytheoriginaldesigneroftheprogram.
18.2.3 Linking to other functions

Almost all spreadsheets now have databases linked to them, and powerful graphics
components, which allow themtotakedatain aspreadsheet andturn itimmediately intoa
graph of the user's choosing, with many additional features available tocreate impressive
graphical displays of results of spreadsheet analyses.Because the graphing isintegral to
the spreadsheet, graphs can be easily updated when newdata are entered. Some also have
presentation creation modules, which allow computer-operated slide shows tobe created
directly from the spreadsheet information and directly entered text, to give public
presentations offindings.
Because spreadsheets are a major component of total software sales, many smaller
companies have developed creative add-on modules for other companies' spreadsheets,
to carry out functions not available within the main spreadsheet. Some of these enhance
spreadsheet function, suchastheprogram @RISK,whichextendstheanalytical capacityof
the spreadsheet in ways to be described below (see section 18.5).Others add totally new
functions, evenasextremeasmakingthespreadsheet doubleasawordprocessingprogram,
something for which it was never designed. Soif you have aspecial need and the feature
234
Building a spreadsheet model
is not offered by your spreadsheet, you may be able to buy it and 'attach' it to the
spreadsheet.
Spreadsheets which operateunder Microsoft Windows have far greatercapacity than MS-
DOSprogramstopassinformation automatically betweendifferent programs.Thisusestwo
techniques -Object Linking and Embedding (OLE) and Dynamic DataExchange (DDE).
They are best explained by examples.Object embedding means that an 'object' (table of
analysis results, graph, etc.) is taken from one program (here the electronic spreadsheet,
which isknown asthe OLE serverbecause itprovides thedata) andembedded as an exact
copyinafileofanotherprogram(commonly awordprocessingprogram,whichisactingas
anOLEclient oruser).Thiscould alsobedonebypastingthrough theWindows clipboard,
but in that case all connection with the original program is lost. When an object is
embedded, and you then click onthe object with your mouse intheclient application, the
computer will automatically load the program in which the object wascreated and thefile
which contained theoriginal object. Youcan then edit itand closethe 'server' application,
whichwillreturnyoutotheclientapplication andthefileyouwereworkingon,butwiththe
modified object now appearing onthe screen.
When anobject islinked ratherthan embedded, thereisadirect linkagebetween thefilein
the client application and the file containing the 'object' in the server application. If you
change the source file in the spreadsheet, next time you load the client file in your client
application itwillchangetheinformation intheobject itemtomatchthedatainthesource,
without the user needing to manually make the changes or even know what the changes
are.
When DDEisused, the linking of files istwo-way. Ifachange ismadeinthefilein either
of the pair of dynamically connected programs, the 'twin' file in the other program is
automatically updated before usingitnexttime.
How does this make spreadsheets more powerful? When working on a report which
includesanumberofgraphsandtablescopiedfrom thespreadsheeteconomicanalyses,you
can then embed each of them within the document. For modifying the layout or other
features, youcangobackintothespreadsheettodoit,andkeepagreementbetween the files
inthetwoprograms,usingallthepowerofthespreadsheet from within theword processing
program. Moreover, you canembed anobject inareport andcomplete it,then later change
the spreadsheet file but the graph in thereport will stay as it was when you finished the
report. This is how embedding differs from linking. Linking can be very useful if you
periodically havetoupdateadocument (amonthlyreporttoafarmer ortoseniormanagers).
Italwayscontainsthesametablesbutthedatamustreflect newinformation, suchasincome
andexpenditure for themostrecent month.Eachtimethedocument isopened, it checks to
see if the spreadsheet hasbeen altered, and if so it will update the linked objects in the
word processing document to make them agree with the spreadsheet. By creating a
spreadsheet tostore thedata and linking themtothereport,you can automate and simplify
theprocedureofproducingthemonthlyreport.Dynamicdataexchangeisthemost complex
of these procedures to operate, but canbe very useful in selected cases - for example if
dataarecomingincontinuously intoadatabasethroughdailyentryofnewrecords,andyou
235
Chapter 18
wanttomaintain aspreadsheet filecontainingsummariesofthedataaccurateuptothelatest

records entered.
18.3 Choice of program

Fashions change in spreadsheets, and the program Visicalc which started the whole trend
hasdisappeared from thescene.Formuchofthe 1980sthedominantprogram inthemarket
was Lotus 1-2-3, because it added new features and simplified the way of working with
the spreadsheet,butithaslost itsdominance.Ofthelargenumberof spreadsheet programs
developed since Visicalc, three Window programs now dominate the market: Excel
(Microsoft), Lotus 1-2-3 (Lotus/IBM) and QuatroPro (Novell).Most active spreadsheet
users work in Windows because of the ability to handle larger spreadsheets, to display
superior graphics,print toanyprinter andtouseOLE.The spreadsheet templates supplied
with thisbook will run in all of these.Eachprogram has itsown file format, but each can
read someof thecompeting formats aswell.
18.4 Formulating asimple economic analysis
18.4.1 Partial budgeting asan example

The most common form of economic analysis used at farm level will be apartial budget.
Using asanexampleabudgeted analysisofparasite control insheepwhichwas originally
prepared by hand (Anderson etal.,1976),thenetbenefit of thecontrol program using one
treatment strategy canbe laid out asshown inFigure 18.1.The analysis for this paper had
taken afull weekofwork,butcouldnowbedoneinaspreadsheet inafraction ofthetime,
and withgreater accuracy.
In the form of apartial budget theanalysis fits easily into aspreadsheet format. Column A
willbeused forrowdescriptions,andthefirst rowortwoineach oftheothercolumns will
be used for column headings. In this simple form column Bwill be used for the data and
calculations. Cells canbe designated to receive the raw data for the analysis,with blank
cells to separate each group of related items from the others.It isimportant tomake the
layout easy toread and interpret. There areplenty of rows and columns touse,as long as
youkeepeverythingyouneedtoworkonatonetimeonasingle screen.
An important basic rule is to have each data item entered in exactly the form it was
collected, and have theprogram do any pre-processing to get the figures into the right
form for analysis.Forexample,putinwoolweight andpriceperkg,and havetheprogram
calculate fleece value.Similarly, if you must adjust the figures totake account of deaths
during theyear, design the spreadsheet to acceptfiguresfor the number of deaths,and use
this to adjust other parts of the analysis. This saves considerable time, frustration and
mistakes-especially whenyou aretrying todoananalysis infront of a farmer.
Cells aredesignated toreceive calculated values derived from thevarious raw data items,
and formulae are entered into these cells to produce the result automatically. Variables
used inacalculation areidentified bythe cell inwhich they canbe found, while constants
are entered asnumbers.Mathematical operations are designated in theusual way seen on
236
the right-hand side of amathematical equation, using the representation of each operator
required bytheparticular spreadsheet.
Figure 18.1 Simple spreadsheet: Benefit of 'critical' parasite control strategy over 'no
treatment'
1 ColumnA ColumnB Calculation formula
2 1.Additional returns
3
4 Additionalfleecewool 40
5
6 Capital valueof surviving sheep
7 incritical treatment group 263
8
9 Increased value of crutchings 2
10
11 Total 305 B4+B7+B9
12
13 2. Returns foregone
14
15 Capital value of surviving
16 sheepinnotreatment group 222
17
18 Wool salvaged from dead sheep 0
19
20 Total 222 B16+B18
21
22 3. Extra costs
23
24 Extra anthelmintic and labour 13
25
26 4.Reduced costs
27
28 None relevant 0
29
30 Net return 70 (B11+B28)-(B20+B24)
31
32 Return oninvested funds 538 B30x 100/B24
237
Chapter 18
Do not try to encompass the entire calculation in a single formula, but use extra cells
somewhere in the worksheet to show critical intermediate steps in the calculation. By
scanningthese,errorsandunexpectedfindingscanbe identified.
Clearly identify thefinalresult andmakeiteasytoviewtheresultcells oncethedata items
haveallbeen entered.
Once the basics of spreadsheet design have been learned, such a spreadsheet can be
designed and implemented almost as fast asdoingthecalculations once by hand, and can
then be re-used and varied as much as required. It is also easy to prepare generic
spreadsheet 'templates' forcommonlyusedanalyses,whichcarryoutcalculationsonblocks
of cells, so that a single worksheet can be used for a variety of purposes by simply
converting thegeneric block of rows for 'extra costs' or 'benefits nolonger obtained' into
aspecific analysisbyinsertingitemidentifications anddatawithin thecellranges set aside
for thatcategory.Thiswill speed upthework considerably.
18.4.2 Multi-column spreadsheets

Spreadsheets really come into their own when you must link together a number of
component analyses, and when there are cross-links between the various parts of the
analysis. This will be necessary, for example, in an analysis of methods of improving
reproductive performance inabeefenterprise,wheretheincreasedcalvingrateinone year
will affect the number of heifer replacements available two years later, and the age
distribution of cows inlateryears.
Torepresent an analysis of this type,it isnecessary tohave at least one column for each
year, andcommonly tohaveasummary column which shows acost-benefit analysis of the
gainsofimplementingthereproductiveprogram,incomparison withnoaction.Inthiscase,
the spreadsheet makes it easy to discount costs and benefits asrequired in a cost-benefit
analysis,sincethediscounting procedureisabuilt-in function.
For extension purposes, aseries of these spreadsheets can be constructed for different
districtswithintheregion,usingthesameworksheettemplatebutvaryingthedataand some
ofthe formulae toexpress differences between districts.Theoutcome for eachyear within
each district analysis can then be automatically transferred into a linked regional
spreadsheet to produce a summary of expected benefits across the region. Any costs
incurred attheregional level can thenbe subtracted toproduce afinaloverall cost-benefit
ratio and net present value of the program. This was done, for example, in a regional
analysis of aparasite control program invillages inThailand (Meemark &Morris, 1989).
Changing one variable at the farm or village level in such an analysis will immediately
causetheentireanalysistoberecalculated. Itisalsopossibletolinkthedistrict worksheets
sothat achangeincertain variables (such asproduct andinput prices)intheworksheet for
district 1will automatically transfer to all other districts, while figures such as calving
rates arekept distinct.
18.4.3 Spreadsheet notebooks and three-dimensional spreadsheets

It is often useful to work with a group of spreadsheets which carry out related analyses
238
Buildingaspreadsheet model
with different setsof assumptions.Theleading spreadsheets offer systems for combininga

group of spreadsheets aspages in an electronic notebook, sothat they can be worked on
together veryeasily.
18.5 Spreadsheetmodelswith riskconsiderations

Computer models have been used extensively toanalyse disease control problems. Often
these models are written in acomputer language such asTurbo Pascal, and knowledge of
such alanguage is aprerequisite for writing theprogram. It ispossible now to construct
moderately complex models purely within electronic spreadsheets, thus allowing people
with very limited programming ability toproduce models which are dynamic, ie, they
represent changes in a system through time, in an iterative fashion. Some spreadsheet
programs have special enhancements to assist in such advanced uses. Spreadsheet
modellingisanexcellent startingpointindevelopingamodel,sinceafunctional versioncan
be developed quickly, although if the model is to be used extensively it may be best
transferred toaprogramming languageoncethefull designhasbeenworkedout,mainly for
gainsin speed andease ofuse.
The complicating factor in most mathematical models arises from chance or stochastic
elements. The @RISK computer package is available asan add-in for Lotus 1-2-3,Excel
and Symphony and brings advanced modelling and risk analysis to these worksheets
(Palisade, 1992). In general, the technique in an @RISK analysis encompasses the
following four steps,of whichthe first threecanbe supported.
1.Developing amodel-bydefining aproblemorsituation intheformat ofthe spreadsheet
package you areusing.
2.Identifying risk - setting upthe risky variables inthe worksheet sothat their possible
values canbe specified withprobability distributions, and identifying the risky outcome
variables intheworksheet results tobe analysed.
3. Analysingthemodelwithsimulationusingrandomnumbers-todeterminetherangeand
probabilities of allpossible outcomesfor theresultsof the worksheet.
4.Making adecision -based onthe resultsprovided andpersonal preferences.
Probability distribution plays animportant role in any analysis which incorporates risk.
Aprobability distribution is amathematical device for presenting the quantified risk for a
variable.Therearemany forms andtypesofprobability distributions available in ©RISK,
eachof whichdescribesarangeofpossiblevaluesandtheirlikelihoodofoccurrence.There
is awide variety of distribution types ranging from uniform and triangular distributions to
morecomplex forms such asgammaandWeibull (Figure 18.2).
In @RISK, all distribution types use asetof arguments tospecify arange of actual values
and distribution ofprobabilities,ascanbeseen inFigure 18.2.Thenormal distribution, for
example, uses amean and standard deviation asitsarguments.Themean defines thevalue
around which thebell curve willbe centred and the standard deviation defines the spread
of values around the mean. Over thirty types of distributions are available in @RISK for
describing distributions for uncertain values intheworksheets.
239
Chapter 18
1.0 0.5
0.8-f @NORMAL(0,1) @UNIFORM(0.2,0.6)
0.4
0.6-
0.34
0.2
0.1+
- 4 - 3 - 2 - 1 0 1 2 3 4 0 0.10.20.30.40.50.60.7 0.8
@DISCRETEf11,1,12,2,14,5,15,1.5,16,0.5,5)
0.5 0.5 -t-
@TRIANG(2,3,7)
0.4
0.3
0.3 -
0.1
0.2 0.1 -
_L
0 1 2 3 4 5 6 7 11 12 13 14 15 16 17 If
@GAMMA(1,1) @WEIBULL(1,1)
l.o- 1.0
0.8- \ '" @GAMMA(2,1) 0.8- \ r \ @WEIBULL(2,1)
0.6-
\ / @GAMMA(3,1) 0.6- -ƒ \ \
0.4- A\/~^\ .-' 0.4-

0.2- 0.2•
0 1
Figure 18.2Example probability distribution graphs (normal, uniform, triangular, discrete,

gamma and Weibull)
In @RISK, uncertain variables and cell values are entered as probability distribution
©functions, for example: @TRIANG(A3/2.01,A4,A5), when you are using Lotus 1-2-3.
This example is atriangular function with the minimum (actual value incell A3 divided
by 2.01),mostlikely (actual valueincellA4)andmaximum (actualvalueincellA5) value
as arguments respectively. These ©functions can be placed in the worksheet cells and
240
formulaejust like any other 1-2-3 ©function.

Sampling is used in ©RISK simulation to generate possible values from probability
©functions. These sets of possible values are then used to evaluate the worksheet by
sampling from the distributions perhaps 100or 1000times. Sampling is the process by
which values are randomly drawn from input probability distributions. Because of this,
samplingisthebasisforthehundredsorthousandsofrepeated 'what-if' scenarios ©RISK
calculates fortheworksheet.Eachsetofsamplesrepresents apossiblecombination ofinput
values which could occur.Sampling in asimulation isdone repetitively -with one sample
drawn every iteration from each input probability distribution. With enough iterations,the
sampled values for aprobability distribution will become distributed in amanner which
approximates the known input probability distribution. The statistics of the sampled
distribution -mean, standard deviation and higher moments -will approximate the true
statisticsthatwereinputforthedistribution.Itisnotnecessarytomakeeveryvariableinthe
spreadsheet stochastic. Commonly this is limited to asmall number of critical (ie, most
important)variables.
Thedecision maker shouldrecognize that analysisincorporatingriskcannot guarantee that
the action which is chosen to follow - even if skilfully chosen to suit the personal
preferences -isthebest action viewed from theperspective ofhindsight. Hindsight implies
perfect information, whichisnever available atthetimethedecision ismade.The decision
makercanbeguaranteed,however,that(s)hehaschosenthebestpersonalstrategygiventhe
(imperfect) information thatisavailable.
18.6 User-friendly spreadsheets

When the designer of aspreadsheet template is also the only user, layout is not acritical
point in design,although itiswise tokeepthestructure uncluttered andeasy towork with.
Once aworksheet is distributed to others,itbecomesjust asimportant toproduce alayout
which iseasytouseanderror-resistant asitistohaveallthecalculations correct.
There aresomeimportant considerations inachieving this.Mostworksheets which contain
substantial calculations cannot be fitted intoa single screen, soanew design structure is
required.This shouldbebased around programmedjumps from celltocell.The worksheet
is divided upinto a series of single screens, such as Introduction, Data Entry, context-
sensitive Help screens for various parts of the worksheet and Results.There will usually
be quite alarge number of cells required for intermediate calculations, which the typical
userneed neversee.
Asimple way of achieving this is tohaveblocks of cells,each comprising one screen-full,
todisplayeachofthemajor partsoftheworksheetwithwhichtheuserwillwanttointeract
-suchasadataentry screen,oneormoreresultsscreens,andanexplanation screen foreach
area of the results. These screens should be easy to read and interpret, and automatic
procedures should be used tojump from thecurrent screen tothenext one theuser should
see,once theuserrequeststhejump.Blocks of screen area canbereserved for explanatory
material which the user must read but should never alter.These blocks can be 'locked' so
that thecursor cannot enterthem in normal use.
241
Chapter18
Within blocks dedicated todata entry or calculation, subblocks should be laid out which
contain closely related material which can be handled as aunit. For example, it may be
necessary to add up rows 12to 30in column G. Instead of having torefer toeach cell in
the sequence by name ineach formula aswould be necessary if they were spread around,
theycanbehandled asaninclusiveblock SUM(G12..G30)or similar.
Intermediate calculations should be stored in columns separated from the user-accessible
ones sufficiently, sothattheuserisnever awareoftheirexistenceinnormal circumstances.
This allows for ease of use but also allows the expert to check calculations easily.
Annotation features in aspreadsheet or an add-in program allow explanatory notes to be
attachedtocellsofaspreadsheet,mainlyasanaidememoirtothelogiconwhichacomplex
cell formula isbased. This feature isextremely useful, since otherwise aformula that was
quite clear six months agobecomes incomprehensible when reviewed, and may then be
modified in away whichundermines the structure ofthe spreadsheet.
If any procedure must be carried out repeatedly in working with aspreadsheet, it is most
efficient toprogramitinadvancebywritingamacro,asmallprogramwhichmostcomputer
users can prepare. This carries out a specific set of steps within the spreadsheet, which
mayvaryfrom something assimpleaschanging afont inasinglestep,torunningacomplex
analysisby hitting onekey.
The spreadsheets supplied withthisbook all work inaccordance withthese principles as
much as possible, and use techniques such as macros. Not all features of each single
spreadsheet program could be fully used, however, because the cases were designed such
that they run inall 3programs involved (ie,Excel,Quattro andLotus).
18.7 Usingthespreadsheet
Normally awell-designed template will take the user in asequence of automated jumps
throughallthedataentrystages,andafterthelastitemhasbeenentereditwillautomatically
carry outitsrecalculation andpositionthecursoratthefirstresultscreen.Recalculationcan
however either be made automatic or be made to await a user instruction. One small
problem with automated spreadsheets isthat anerrorwhichisrecognized after adataentry
point ispast cannot becorrected without repeating therun.
For a very polished spreadsheet, this can be overcome by copying each data item to a
check screenjustbefore calculationcommences,wheretheuserisgiven achancetoreview
the items entered and to loop back to correct any specific errors. After confirming the
accuracy of thevalues,calculation will commence.
Onemajoruseofaspreadsheetistocomparetheeffect ofsomepotentialimprovementwith
a 'base' analysis representing the status quo. In simple analyses this must be done by
printing theresult screen for thebase analysisandthen running thealternative and printing
thattoallow acomparison ofthetwo.Anadvanced alternativeistoallowtheresult screens
to show two sets offigures,onefor thebase analysis andone for the alternative.The base
analysis caneitherbe repeated each time acomparison isdone,orbe processed separately
and merely stored visually in the result screens toremind the user of the baseline values
against whichthe alternative shouldbecompared.Printedcopieswillcontain bothvalues.
242
An important part of an economic appraisal is sensitivity analysis, where the most

influential biological and price variables in the analysis are each varied to test how
susceptible the predicted financial return is todifferences between estimated and actual
itemsintheanalysis,andvariationwhichcanbeexpected overtimeinmajor variablessuch
as product price.The limits within which sensitivity analysis isconducted are amatter of
choice to fairly represent the field situation. With regard to prices, thelong-run range of
lowest to highest may be taken (perhaps adjusted to current year equivalence), or else
fixed percentage variation maybetaken (say 10and20%above andbelowcurrentvalues).
With regard tobiologicalvariation inmeasured variables such asgrowth rateorpregnancy
rate, sensitivity analysis may either be taken at 1and 2 standard deviations from the
measured sample mean, oragain be allowed tovary by apercentage of the mean value.It
is good practice toconsider the mean orexpected value and two levels of variation above
andbelow themean,thusrequiring fivecalculations intotal.
Spreadsheets really come into their own in sensitivity analysis, because what would
otherwise havebeen atediousprocessofrepeatingtheentirecalculation becomes asimple
matter of changing oneormorevariables andviewing theresult. Iteven becomes possible
to adjust twovariables at once (sayproduct price and growth rate response) toproduce a
bivariate response surface, something which is far too cumbersome by hand because 25
evaluations are required for asingle sensitivity analysis. If desired, the 25 results can be
stored and then graphed ina3-dimensionalrepresentation of aresponse surface within the
same program.
18.8 Examples of the useof spreadsheets in practice

There are numerous spreadsheet templates of veterinary economic calculations available,
eitherthroughdistribution from thedeveloperorthroughpublication oftheprocedure ina
scientificjournal.Examplesatthebasiclevelinclude Quekera/. (1986), andGulbenkian &
Viegas(1988).Dijkhuizenetal. (1986)provideamuchmoreextensiveanalysissystemusing
a spreadsheet to analyse sow replacement economics, embodying most of the principles
outlined. Carpenter (1988a,b) demonstrates the use of a spreadsheet in epidemiological
modelling.Numerousotherveterinary examplesof spreadsheets existinboth epidemiology
andeconomics.
Inpractice some very complicated simulation models with many interacting demands and
serviceshavebeenused.Wholesectionsofanorganizationhavebeensimulated.Thelimitsare
onlythecapacityofthecomputerandthetimetakentoworkandtesttheprogram.Muchofthe
workhasbeenfacilitatedbydevisingspecialcomputersimulationlanguagessuchas @RISK.
Quantitative analysistechniqueshavegained agreat dealofpopularity withdecision makers
andanalystsinrecentyears.Unfortunately, manypeoplehavemistakenlyassumed thatthese
techniques aremagicblackboxesthatunequivocally arriveatthecorrect answerordecision.
Notechnique,includingthoseusedby @RISK,canmakethatclaim.Thesetechniques are
toolsthat canbeusedtohelpmakedecisionsandarrive atsolutions.Like any tool,theycan
beusedtogoodadvantagebyskilledpractitioners,but shouldneverbeusedasareplacement
forpersonaljudgment.
243
Chapter 18
References
Anderson,N.,Morris, R.S.&McTaggart, I.K., 1976.Analysis of two schemes for the anthelmintic
control of helminthiasis inweaned lambs.Australian Veterinary Journal 52:174-180.
Carpenter, T.E., 1988a. Stochastic epidemiologic modeling using a microcomputer spreadsheet

package.Preventive Veterinary Medicine 5: 159-168.
Carpenter, T.E., 1988b.Microcomputer programs for Markov and modified Markov chain disease
models.Preventive Veterinary Medicine 5: 169-179.
Dijkhuizen, A.A., Morris,R.S.&Morrow, M., 1986.Economic optimization of culling strategies

in swinebreeding herds,using the 'Porkchop' Computer Program.Preventive Veterinary Medicine
4:341-353.
Gulbenkian, M. &Viegas,F.J.T., 1988.OVISERRA: Acomputerized herd management system

for dairy ewes.Acta Veterinaria Scandinavica, Supplementum 84,p.530.
Meemark, N. &Morris, R.S., 1989.Economic analysis of thebenefits of the Basic Animal Health
Service.Proceedings International Seminar on animal health and production services for village
livestock, Khon Kaen,Thailand, August 1989:465-477.
Palisade, 1992. @RISKUsersGuide,Risk analysis and simulation add-in for Lotus 1-2-3,Palisade
Corporation, 31 DeckerRd,Newfield, NY 14867,374pp.
Quek, K.L.,Ng,C.Y. &Chang, CF., 1986.PigMoney: Application of electronic spreadsheet inthe

economics of pig production. Proceedings 4th International Symposium on Veterinary
Epidemiology and Economics, Singapore, 1985:256-257.
244
19
Computer excercises on animal health economics
Design:
C.W. Rougoor &A.W. Jalvingh
Supervision:
A.A. Dijkhuizen, R.S.Morris & R.B.M. Huirne
This chapter includes a printout of the computer excercises developed for use in the
spreadsheet programs Lotus 1-2-3 andQuattroProfor DosandExcel for Windows.
Tostart theexcercises follow theinstructions supplied withthediskette.
© Copyright 1995:
Wageningen Agricultural University
Department of Farm Management
theNetherlands
245
Chapter19
246
B
1
2 COMPUTER EXERCISES ON ANIMAL HEALTH ECONOMICS
3 = Principles and Applications =
4 Version 2.0 - September 1995
5
6
7 INTRODUCTION (Current file: INTROAHE.WK1)
8
9 This introductory worksheet provides information on the computer
10 exercises in general and onthe different cases inparticular.
11
12
13 Design: C.W. Rougoor SA.W. Jalvingh
14 Supervisors: A.A. Dijkhuizen, R.S.Morris & R.B.M. Huirne
15 (c)Copyright:
16 Wageningen Agricultural University
17 Department of Farm Management
18 Hollandseweg 1
19 NL-6706 KN Wageningen
20 Press PgDn
21 About the computer exercises on animal health economics
22
23
24 Each exercise is available as a separate file (worksheet format)
25 that can be opened inthe spreadsheet of your choice.
26
27 The fileswith the exercises can be found inthe directory C:\AHE
28 when you have used the automatic installation procedure. In case of
29 manual installation,the files are inthe directory of your choice.
30
31 The exercises have beenmade up in away that onepage has 20 lines.
32 In case you seemore or fewer than 20 lines on your screen,you should
33 change the settings of your spreadsheet. How this can be done depends
34 on the spreadsheet you are using.
35
36 In certain spreadsheets you can open more than one worksheet at a
37 time. Inthat case you can easily switch between the exercises and
38 this introductory text.
39
40 Press PgDn
41 Available files
42
43 Basicmethods:
44 PRFUNCT1.WK1 Production Function
45 PRFUNCT2.WK1 Production Function (extra exercise)
46 PARTBUD.WK1 Partial Budgeting
47 COSTBEN.WK1 Cost-Benefit Analysis
48
49 Advanced methods:
50 LINPROG.WK1 Linear Programming
51 DYNPROG.WK1 Dynamic Programming
52 MARKOV.WK1 Markov Chain Simulation
53
54 Decision analysis of risky choices:
55 MONTCAR.WK1 Monte Carlo Simulation
56 DECANAL.WK1 Decision Analysis
57 DECTREE Decision-Tree Analysis (not a spreadsheet exercise!)
58
59 Continue by opening the file of your choice, Below you can find more
60 information on each exercise. Press PgDn
247
Chapter19
A I B I C I
61 More information on exercises
62
63 Name of file: PRFUNCT1.WK1 Production Function
64 Title of case: Farm advisory case
65 Purpose: 1. Understanding the principles of aproduction function.
66 2. Determining the optimal level of veterinary services
67 at a sow farm.
68 Keywords: Variable costs, fixed costs,production function,
69 marginal and average costs and returns.
70 Time: Approximately 30min necessary forthe main exercise.
71 Another 15min for the (optional) sensitivity analysis.
72
73 Name of file: PRFUNCT2.WK1 Production Function
74 Title of case: Helminthic case:an experimental example
75 Purpose: 1. Understanding the principles of aproduction function.
76 2. Example of aproduction function with real data.
77 Keywords: Variable costs, fixed costs,production function,
79 Time: 30min for the entire case.
80 Press PgDn
81 Name of file: PARTBUD.WK1 Partial Budgeting
82 Title of case: Caesarean section in dairy cattle
83 Purpose: 1. Understanding the principles of partial budgeting.
84 2. Calculating the costs of caesarean section in cattle.
85 Keywords: Static, additional returns,reduced costs,returns foregone,
86 extracosts.
87 Time: Approximately 20min necessary forthemain exercise.
89
90 Name of file: COSTBEN.WK1 Cost-Benefit Analysis
91 Title of case: Enzootic bovine leucosis
92 Purpose: 1. Understanding the principles of cost-benefit analysis.
93 2. Comparing 2 strategies to eradicate enzootic bovine
94 leucosis.
95 Keywords: Dynamic, real interest rate,net present value, benefit-cost
96 ratio, internal rate of return.
97 Time: Approximately 30min for themain exercise, including 10
98 min for the optional calculations with real interest rate.
99
100 Press PgDn
101 Name of file: LINPROG.WK1 Linear Programming
102 Title of case: Cows and/or sheep
103 Purpose: 1. Understanding the principles of linear programming.
104 2. Finding the economically best combination of keeping cows
105 and/or sheep,taking two constraints into account.
106 Keywords: Static, constraints, objective function, optimization.
107 Time: Approximately 30min for thebasic principles. Another
108 10min for carrying out the (optional) sensitivity analysis.
109
110 Name of file: DYNPROG.WK1 Dynamic Programming
111 Title of case: Sow replacement
112 Purpose: 1. Understanding the principles of dynamic programming.
113 2. Finding the economically best moment of replacing a sow.
114 Keywords: Dynamic, stage,state,optimization, retention pay-off (RPO)
115 Time: Approximately 30min for the basic principles, after that
116 another 5min for calculating the RPO and/or 10min for a
117 sensitivity analysis.
118
119
120 Press PgDn
248
Computerexcercisesonanimalhealtheconomics
B 1 C | D | E | F |
121 Name of file: MARKOV.WK1 Markov Chain Simulation
122 Title of case: (A)Pneumonia in sheep
123 (B)Mastitis indairy cattle
124 Purpose: 1. (adA) Understanding the principles of aMarkov chain.
125 2. (ad B)Comparing different strategies for treating mastitis
126 to find the economically bestone.
127 Keywords: Dynamic, transition matrix, state,vector, stable situation.
128 Time: (A)will take about 15min. The first part of (B)takes
129 15min. The second part (optional;dynamic transition rates)
130 takes another 15min.
131
132 Name of file: MONTCAR.WK1 Monte Carlo Simulation
133 Title of case: Aujeszky's disease in swine
134 Purpose: 1.Understanding Monte Carlo simulation.
135 2. Simulating the number of animals infected with Aujeszky's
136 disease in aherd and its financial effect over time.
137 Keywords: Dynamic, random sampling, simulation.
138 Time: Approximately 30min for themain exercise.Another 10min
139 forthe optional exercise (different initial situation).
140 Press PgDn
141 Name of file: DECANAL.WK1 Decision Analysis
142 Title of case: Left-displaced abomasum in cattle
143 Purpose: Comparing different strategies to treat displaced
144 abomasum, taking risk into account.
145 Keywords: Static,expected monetary value,maximin, minimax, maximax,
146 utility, Bayes'theorem, value of information.
147 Time: Total time necessary 60min, including 15min for utility,
148 and 20min forvalue of information. Both areoptional.
149
150 Name of file: DECTREE Decision-Tree Analysis
152 Purpose: 1.Understanding the principles of building adecision tree.
153 2. Comparing strategies,taking into account probabilities of
154 success and failure.
155 Keywords: Decision tree,probabilities,expected monetary value
156 Time: Total time necessary about 40min.
157 NOTE: This exercise does nottakeplace in a spreadsheet,but uses the
158 program SMLTREE. Ifyou have theprogram available, start it and use
159 the fileDECTREE forthe exercise. The questions that gowith the
160 exercise can be found inthebook. Press PgDn
161
162
163 END OF INTRODUCTION
164
165 Continue by opening the exercise (= file)of your choice in
166 the spreadsheet.
167
168
169 COMPUTER EXERCISES ONANIMAL HEALTH ECONOMICS
170 = Principles andApplications =
171 Version 2.0 -September 1995
172
173 Design: C.W. Rougoor &A.W. Jalvingh
174 Supervisors: A.A. Dijkhuizen,R.S.Morris &R.B.M. Huirne
175 (c)Copyright:
178 Hollandseweg 1
180
249
Chapter19
B E F
1
5
6 Current exercise: PRFUNCT1.WK1 Production Function
7 Title of case: Farm advisory case
8
9 Purpose: 1.Understanding theprinciples of aproduction function.
10 2. Determining the optimal level of veterinary services
11 at a sow farm.
12 Keywords:Variable costs,fixed costs,production function,
14 Time: Approximately 30min necessary forthe main exercise.
15 Another 15min forthe (optional) sensitivity analysis.
16
17
18
19
20 Press PgDn
21
22 PRODUCTION FUNCTION
23
24 "FarmAdvisory Case"
25
26
27 A pig farmerwants to increasethe number of pigsweaned per
28 sowper year. (S)he asks aveterinarian for help.The veterinarian
29 tells him/her that it is possibleto participate in aherd health
30 program,which includes that the veterinarian will visit the farm
31 regularly to check the herd and to give advice.The results depend
32 on the number of visits peryear.The farmer can choose howmany
33 veterinary visits (s)heprefers.
34
35
36
37 After you have finished apage,you can continue by pressing PgDn.
38
39
40
41
42 Experience inthe past showed an effect on pigsweaned per sow per
43 year as stated below:
44 no. of visits pigs weaned per
45 per year sow per year
46
47 0 18.00
48 5 18.30
49 10 18.80
50 15 19.50
51 20 20.10
52 25 20.50
53 30 20.80
54 35 21.00
55 40 21.10
56
57 The above scheme isusually called production function. Inthe graphical
58 representation of this function,the input of visits isplaced on the
59 X-axis and the piglet output ontheY-axis.
60 Press PgDn
250
B E
61
62 Let us have a look atthis graph.Excel-user: Press <CTRL> G;Lotus-
63 user: Press <ALT> G and Quattro Pro-user: Press <ALT> P. Pressing any
64 keywill bring you backtothis screen.
65
66 The costs of the herd health program, of course,depend on the number
67 of visits per year (thevariable costs). There are also some fixed
68 veterinary costs, independent ofwhether or not the farm participates
69 inthe herd health program: medicine costs etc.
70
71 Variable costs pervisit (US$) 120
72 Fixed veterinary costs per year (US$) 1500
73
74 The counterbalance of these costs isthe net returns from more pigs
75 weaned per sowper year.
76
77 Net returns from 1extra piglet (US$) 30
78 Number of sowsonthe farm 100
79
80 Press PgDn
81
82 All these additional costs and returns have to be taken into account to
83 calculate the net revenue of the herd health program.
84
85 Calculatethe total returns fromthe extra piglets and the totalveteri-
86 nary costs ifthe veterinarian visits the farm 20 times per year.
87
88 (Ifnecessary, goback to the previous screen by pressing "PgUp")
89
90
91 You can fill inthe answer after positioning the cursor inthe right
92 cell (CellE94 and E95;usethe arrow keys or the mouse):
93 US$
94 Total veterinary costs: (1)
95 Total returns extrapiglets: (2)
96
97
98
99 Press PgDn
100
101
102 Thetable below gives thetotal extra piglets per farm, the total
103 variable costs (TVC), thetotal returns (TR) from these extra piglets,
104 and themarginal returns(MR).
105
106 no. of extra TVC MC ($/ TR MR
107 visits piglets ($/farm) piglet) ($/farm) ($/piglet)
108
109 0 0 0
110 5 30 600 900 30
111 10 80 1200 2400 30
112 15 150 1800 4500 30
113 20 210 2400 6300 30
114 25 250 3000 7500 30
115 30 280 3600 8400 30
116 35 300 4200 9000 30
117 40 310 4800 9300 30
118
119 Press PgDn
120
251
Chapter 19
A | B | C | D | E | F | G | H
121
122 The farmer now has to decide what to do:does (s)hewant to participate
123 inthe herd health program? And if so:howmany visits per year should
124 be opted for?
125
126 Tomakethis decision,we need to calculate themarginal costs(MC).
127 Themarginal costs are the additional costs made to get one extra
128 piglet per farm.
129
130
131 Calculate these costs (or:fill in a formula that calculates them
132 for you!) for 5and 10visits per year. You can fill them in the
133 table onthe previous screen.
134
135
136 Return to that screen by pressing PgUp
137
138
139
140
141
142
143
144 Did you calculate and fill inthemarginal costs already?
145
146
147 No? Press PgUptwice to goto the table where you can
148 enter themarginal costs for 5and 10visits.
149
150 Yes? Press PgDn
151
152
153
154
155
156
157
158
159
160
161
162 Ifyou have done itcorrectly you will have found the following values.
163 The average variable costs (AVC) are also given. These values are used
164 tomake agraph of themarginal and average costs and returns (Excel-
165 user: press <CTRL> M, Lotus-user: <ALT> M, QPRO-user: <ALT>N ) .
166 Look at the graph and decide what the farmer should do.
167
168 no. of extra TVC AVC ($ MC ($ TR MR
169 visits piqlets (S/farm) /piglet) /piglet) (S/farm) $/piglet)
170 0 0 0
171 5 30 600 20.00 20.00 900 30
172 10 80 1200 15.00 12.00 2400 30
173 15 150 1800 12.00 8.57 4500 30
174 20 210 2400 11.43 10.00 6300 30
175 25 250 3000 12.00 15.00 7500 30
176 30 280 3600 12.86 20.00 8400 30
177 35 300 4200 14.00 30.00 9000 30
178 40 310 4800 15.48 60.00 9300 30
179
180 Press PgDn
252
181
182 How many visits per year are optimal?
183 You can enter your answer inP183:
184
185
186
187
188
189 SENSITIVITY ANALYSES (optional,15min)
190
191 What isthe optimal decision when thevariable costs of a veterinary
192 visit areUS$180 instead of US$120? You can answer this question by
193 changing the value in cell F71.The results will be recalculated
194 automatically. Walk through thepages by pressing "PgUp" and "PgDn".
195
196 Number of visits per year (fill in F196): | |
197
198
199 Press PgDn
200
201
202 Because of adecreasing demand forpiglets,the price the farmer can
203 make for apiglet next year isexpected to be lower than this year.
204 The farmer iswondering whether it is still profitable next year to
205 participate in the herd health program. We are interested inthe break-
206 even point.The break-even point isthepoint where participating in
207 the program is neither favourable nor unfavourable. Thismeans that
208 themarginal returns of the program will always be lower than, or
209 equal to the average costs.Find the value for the net returns from 1
210 extra piglet where this istrue (You first have to change the price
211 of aveterinary visit back to US$120).
212 Answer in cell F212 (2decimal places): | I
213
214
215
216
217
218 Press PgDn
219
220
221
222
223 Change the net returns from 1extra piglet (in cell F77) to the value
224 you have just calculated and have a look atthe marginal and average
225 cost functions (bypressing <CTRL> M, <ALT> M or <ALT>N ) .
226
227
228 If you have done this correctly, you can see that inthis situation the
229 average costs are always higher than,or equal to,themarginal returns!
230
231
232
233
234
235
236
237
238
239 Press PgDn
240
253
Chapter19
E
241
242 You have finished the current exercise.
243 You can now chooseto:
244 - continue with an extra exercise on production function by opening
245 the file 'PRFUNCT2.WK1'
246 - return to the introductory fileby opening the file 'INTR0AHE.WK1•
247 - quit the computer exercises by closing the spreadsheet
248
249
253
255 Supervisors: A.A. Dijkhuizen,R.S.Morris £R.B.M. Huirne
256 (c)Copyright:
259 Hollandseweg 1
260 NL-6706 KN Wageninqen
254
Computer excercisesonanimalhealtheconomics
1
5
6 Current exercise:PRFÜNCT2.WK1 Production Function
7 Title of case: Helminthic case: an experimental example
8
9 Purpose: 1.Understanding the principles of aproduction function.
10 2. Example of aproduction function with real data.
11 Keywords:Variable costs,fixed costs,production function,
13 Time: 30min for the entirecase.
14
15
16
17
18
19
20 Press PgDn
21
22 HELMINTHIC CASE:AN EXPERIMENTAL EXAMPLE
23
24 In reality it isdifficult to get all data for adetailed description
25 of aproduction function,because you need data from many input levels.
26 Inthis case the financial returns from three anthelmintic schemes were
27 compared with 'notreatment' (treatment 0) in groups of Corriedale ewes
28 using real data from a field experiment.
29
30 Thethree treatment schemeswere:
31 1.Pre-and post-lambing treatment (treatmentI ) ;
32 2. Critical treatment: onetreatment in early summer and a second
33 one inmid-summer (treatmentI I ) ;
34 3.Biweekly treatment:treatment each fortnight to ensure minimum
35 levels of infection (treatmentIII).
36
37
38 Press PgDn
39
40
41
42 Although the treatments do not represent an evenly graded series
43 of steps in investment,they do represent agraded set of levels of
44 parasite control from zero to extremely effective.
45
46 Among other things,thewool cut per ewe (kg)and themean weight of
47 the lambs (kg)weremeasured, which gave the following results:
48
49 Treatment Wool Weight
50
51 0 3.00 19 80 'Wool cut per ewe' is
52 I 3.06 21 80 used tomake a graph
53 II 3.60 22 70 of the production
54 III 3.78 22 70 function. The treatment
55 input isplaced on the
56 X-axis and thewool output on the Y-axis. There isno line drawn
57 between the points,because a linewould suggest acontinuous scale
58 on theX-axis. Excel-user: Press <CTRL> G, Lotus-user: Press <ALT> G,
59 and Quattro Pro-user: Press <ALT> F. You can return to this screen
60 just by pressing any key. Press PgDn
255
Chapter19
61 I E H
62 The difference in the amount ofwool, from the lambs and from the
63 ewes, results in adifference in returns from the four helminth control
64 schemes. The following table shows costs and returns (inUS$) adjusted
65 to a standard flock of 100 sheep:
66 TREATMENT
67 EWES and LAMBS 0 I II III
68
69 Returns: Wool 774 815 969 1006
70 Ewes 353 412 360 380
71 Lambs 215 239 288 266
72
73 RETURNS 1342 1466 1617 1652
74
75 Costs: Anthelmintic and
76 labour 0 21 21 220
77
78 RETURNS - COSTS 1342 1445 1596 1432
79
80 Press PgDn
81
82 To find the optimal treatment,we have to calculate themarginal costs
83 and returns.
84
85 What are themarginal costs of treatment Iand themarginal returns
86 from treatment III?We already calculated the other marginal costs and
87 returns for you. Fill in themissing two numbers (as avalue or as a
88 difference between spreadsheet cells):
89
90 II III
91
92 Marginal Costs 0 199
93 Marginal Returns 124 151 Q
94
95
96
97
98
99 Press PgDn
100
101
102 The X-axis of the production functionyoumadebefore isnot a
103 continuous scale.Therefore it isnot possible to find an optimal
104 point onthe X-axis where themarginal costs are equal tothe marginal
105 returns. But we can find outwhich treatment is 'one step too far',
106 ie, where the marginal costs exceed themarginal returns.
107
108 Which treatment isthe best from an economic point of view?
109
110 0, I, II or III?Enter your answer in cellG110: | |
111
112
113
114
115
116 Press PgDn for a sensitivity analysis on these results.
117
118
119
120
256
121
T^
122 SENSITIVITY ANALYSIS
123
124 Prices used tovalue woolwere those ruling at auction. These values
125 were the highest values obtained over 5years.Theminimum price level
126 of wool inthe past 5yearswas only 27%of the present level.
127
128 Calculate the returns fromwool with thisminimum price level (Cells
129 D69 toG69).Does this change your conclusion about the economically
130 best treatment?
131 Which treatment isthe best:0, I, IIor III?
132 Answer in cellG132: I I
133
134
135
136
137
138
139 Press PgDn
140
141
142
145 - return tothe introductory fileby opening the file 'INTR0AHE.WK1'
147
148
152
154 Supervisors: A.A. Dijkhuizen, R.S.Morris SR.B.M. Huirne
155 (c)Copyright:
158 Hollandseweg 1
160
257
Chapter 19
A | B | C | D | E | F | O | H
1
5
6 Current exercise: PARTBUD.WK1 Partial Budgeting
7 Title of case: Caesarean section indairy cattle
8
9 Purpose: 1.Understanding theprinciples of partial budgeting.
10 2. Calculating the costs of caesarean section in cattle.
11 Keywords: Static,additional returns,reduced costs,returns foregone,
12 extracosts.
13 Time: Approximately 20min necessary for themain exercise.
15
16
17
18
19
20 Press PgDn
21
22 PARTIAL BUDGETING: CAESAREAN SECTION CASE
23
24 To determine the additional costs of and returns from caesarean sections
25 indairy cattle,apartial budgeting approach was used.
26
27 A partial budgeting model divides the costs and benefits into
28 different groups:
29 1.Additional Returns
30 2. Reduced Costs
31 3.Returns Foregone
32 4. Extra Costs
33
34
35 The costs and benefits of a caesarean section include the effects
36 as stated on the next page.
37
38 Press PgDn
39
40
41
42 Effects of caesarean section:
43
44 1. costs of surgery
45 2. drop inmilk production
46 A. less milk
47 B. less feed necessary
48 3.heavier weights of calves
49 4. 20%increase in culling rate
50
51 Enter inrows F44 and F46 to F49 1,2,3,or 4to indicate to which
52 partial budgeting category, asdefined on the previous page,you think
53 that effectbelongs.
54
55
56
57 Nowwewill dealwith the different categories one by one.
58
59 Press PgDn
60
258
61
62 1.ADDITIONAL RETURNS
63
64 The averageweight for female calves is40kg, formale calves 43kg.
65 Calves delivered by caesarean section are on average 3.5 kg heavier.
66 82% of the calves born by caesarean section aremale calves.Calf
67 mortality increases to 12%,compared with 5% in a normal situation.
68 The prices per kg of body weight for calvesare:
69 female calves (US$) 4
70 male calves (US$) 6
71
72 Calculate the average returns from acalf born by caesarean section.
73
74 Enter your answer incell E74: | I
75
76
77
78
79 Press PgDn
80
81
82 Thistable gives the average returns for caesarean section calves
83 and for calves from anormal delivery:
84
85 Normal Caesarean section
86 female male female male
87
88 Weight 40 43 43.5 46.5
89 Price 4 6 4 6
90 % animals 50 50 18 82
91 % mortality 5 5 12 12
92
93 Returns 76 .00 122.55 7.56 201.33
94 Sum 198.55 228.89
95
96 The additional returns are the difference between thesetwo:
97 Additional returns: sum(C-section)- sum(Normal)= 30.34
98
99 Press "PgDn" forthe calculation of the reduced costs.
100
101
102 2. REDUCED COSTS
103
104 After a caesarean sectionthere isadrop inmilk production,
105 resulting ina saving in concentrates:
106 Decrease inmilk production: 70 kg
107 Decrease inconcentrates: 0.5 kg/kg of milk
108 The price of concentrates: 0.20 US$/kg
109
110 Calculate the reduced costs dueto caesarean section.
111
112 Enter your answer incellG112 (2decimal places): |
113
114
115
116
117
118
119 Press PgDn
120
259
Chapter19
121
122 RETURNS FOREGONE
123
124 Wewill give you the value of 'returns foregone':
125 Milk losses after caesarean section are 70 kgon average.
126 The price of one kilogram of milk: 0.40 US$
127 Returns foregone: kgmilk xmilk price = 28.00
128
129 EXTRA COSTS
130 US$
131 Cost of surgery: 150.00
132 Culling:Assume the costs of one animal culled
133 tobe US$340.The culling rate increases by
134 20percentage points (e.g. from 30to5 0 % ) .
135 What are the costs? (answer in F135) | |
136
137
138 Extra costs:surgery + culling = 150.00
139 Press PgDn
140
141
142 Nowwe have calculated the values for the different categories:
143
144 1.ADDITIONAL RETURNS 30.34
145 2. REDUCED COSTS
146 3. RETURNS FOREGONE 28.00
147 4. EXTRA COSTS 150.00
148
149 NET RETURNS (1.)+ (2.)- (3.)- (4.) -147.66
150
151 Iscaesarean section profitable from an economic point of view?
152 Y(es) or N(o)? (cell D152): | |
153
154 SENSITIVITY ANALYSIS (optional, 10min)
155
156 Assume that owing to a change in agricultural policy in the
157 country, the price a farmer canmake for themilk decreases to
158 US$0.15.However,the demand for calves increases.This results
159 in aprice per kg of body weight that istwicethe present price.
160 Press PgDn
161
162 Does this change your conclusion about the profitability of
163 caesarean section? Y(es)orN(o)? (Changethe values of cells E126,
164 D69 and D70,answer in cell G164): | |
165
166
167
168 Will caesarean section ever bemore profitable than anormal delivery
169 (with the given price levels), when we assume that caesarean section
170 does not have any negative effects on calf survival rate, percentage
171 of animals kept inthe herd, and milk production?
172
173 Enter your answer inG173 (Y(es)or N(o)):
174
175
176
177
178
179 Press PgDn
180
260
Computer excercisesonanimal health economics
181
182
185 - return to the introductory fileby opening the file 'INTROAHE.WK1'
187
188
192
194 Supervisors: A.A. Dijkhuizen,R.S.Morris & R.B.M. Huirne
195 (c)Copyright:
198 Hollandseweg 1
200
261
Chapter19
I
COMPUTER EXERCISES ON ANIMAL HEALTH ECONOMICS
5
6 Current exercise:COSTBEN.WK1 Cost-Benefit Analysis
7 Title of case: Enzootic bovine leucosis
8
9 Purpose: 1.Understanding theprinciples of cost-benefit analysis.
10 2. Comparing 2 strategies to eradicate enzootic bovine
11 leucosis.
12 Keywords: Dynamic, real interest rate,net present value, benefit-cost
13 ratio, internal rate of return.
14 Time: Approximately 30min for themain exercise, including 10
15 min for the optional calculations with real interest rate.
16
17
18
19
20 Press PgDn
21
22
23 COST-BENEFIT ANALYSIS: ENZOOTIC BOVINE LEUCOSIS CASE
24
25 Suppose 2 strategies A and B are available to eradicate enzootic
26 bovine leucosis in cattle in aparticular area.Costs due to the
27 disease areproduction losses.
28 The benefits of an eradication program are the total of expected
29 losses that are avoided. The costs are those invested inthe program.
30 We suppose that the costs and benefits occur at the end of each
31 year.
32
33 A calculation isnecessary to know which strategy isthe most
34 favourable from an economic point of view.
35
36
37
38
39 Press PgDn
40
41
42 The costs and benefits of the 2 strategies are:
43
44 Strategy A Strategy B
45 Year Costs Benefits Costs Benefits
46
47 20 0 2 1
48 10 8 2 3
49 7 14 4 6
50 4 18 5 7
51 0 23 6 14
52
53 Real interest rate 5 %
54
55 The real interest rate is used to calculate the discount factor,
56 which isneeded to determine the present value of future costs and
57 benefits.
58
59 Press PgDn
60
262
B
61
62 Calculate the discount factor that isnecessary to calculate the
63 present value of the costs and benefits of years 1and 2.Use the
64 given interest rate (Give your answer in 2decimal places):
65
66 Discount factor year 1 (cellF66): (1)
67 Discount factor year 2 (cellF67): (2)
68
69
70
71
72
73 If you want to practise calculating the discount factor abitmore,
74 press F5.Excel-user: type "Q21", Lotus-and Quattro Pro-user:
75 type "K21"and press Enter.
76 The table on the next page gives the discount factors and the net
77 present value of the costs and benefits for years 1to 5for both
78 strategies.
79 Press PgDn
80
81 PRESENT VALUES
82 Discount Strategy A Strategy B
83 Year factor Costs Benefi Costs Benefits
84
85 1 0.95 19.05 0.00 1.90 0.95
86 2 0.91 9.07 7.26 1.81 2.72
87 3 0.86 6.05 12.09 3.46 5.18
88 4 0.82 3.29 14.81 4.11 5.76
89 5 0.78 0.00 18.02 4.70 10.97
90
91 Total 37.46 52.18 15.99 25.58
92
93 These values are used to calculate the different criteria. Calculate
94 the Net Present Value (NPV)of strategy B and the B/C ratio of
95 strategy A.Answer in cell F97 and cell C98 (2decimal places):
96
97 Net Present Value 14.72 :
98 Benefit-Cost Ratio| 1.60
99 IRR approximation 23.90 >=80
100 Press PgDn
101
102 Which strategy would you advise based on the NPV?
103 Strategy A or B? (cell F103) Q
104
105
106
107 Which strategy would you advise based onthe B/C ratio?
108 Strategy A or B? (cell F108) |
109
110
111
112 Consider the following statement and say whether it isT(rue) or
113 F(alse) (answer in F116):
114 When the objective of the eradication program isto get as much
115 money back for every dollar invested in it,the Net Present
116 Value isthe best selection criterion. I I
117
118
119
120 Press PgDn
263
Chapter19
B I C I D I E
121
122 At what real interest rate arethe benefits equal to the costs for
123 strategy A? You can check your answer by filling inthat real
124 interest rate inthe previous calculation!
125
126
127 SENSITIVITY ANALYSIS
128
129 The real interest rate increases.Thiswill have adifferent effect
130 on the NPV and the B/C-ratio of both strategies.
131
132 You can see this effect by using areal interest rate of14%.
133 Which strategy would you advise now?
134 Strategy A or B? (cell F134) | |
135
136
137
138
139 Press PgDn
140
141
142
145 - return to the introductory file by opening the file 'INTROAHE.WK1'
147
148
152
155 (c)Copyright:
158 Hollandseweg 1
160
264
21
^ZZL
22 CALCULATIONS WITH THEREAL INTEREST RATE
23
24 A benefit of US$100 to be obtained inone year has lessvalue today
25 than abenefit of US$100 received immediately, because of interest
26 yields. Future costs and benefits,therefore, should be discounted,
27 resulting intheir present value.
28 In the estimated costs and benefits over the different years, inflation
29 isusually not taken into account.Therefore, inflation should not be
30 included inthe interest rate either. Thisvalue,the real interest
31 rate, is lower than the normal interest rate,and often more stable.
32 For every year and real interest rate a discount factor can be
33 calculated. This factor is l/(l+real interest rate/100) for costs
34 and benefits received inyear 1.
35
36 Calculate the discount factor for areal interest ate of 9% for
37 year 1. (Answer in cell P37,with 2 decimals) | |
38
39
40 Press PgDn formore examples.
41
42 Use the calculated discount factor to calculate the present value of
43 US$725 to be obtained inyear 1.
44 (Answer in cell P44,nodecimals) | |
45
46
47
48 The formula for calculating the discount factor for more than one
49 year iswhen 'n'isthe number of years and 'i'isthe real interest
50 rate: discount factor = 1/(1 + i/100)"n.
51
52 Calculate the present value of receiving (for sure)US$200 each
53 year over the first 4years,when the real interest rate is 6%.
54 (Start with calculating the discount factors for years 1to4 ) .
55
56 Present value (cell P56, no decimals): | |
57
58
59
60 Press PgDn
61
62
63 Let us try it the other way around:
64 The present value of US$25 you will get intwo years isUS$ 23.11.
65
66 What isthe real interest rate? (cell P66)
67
68
69
70
71
72
73
74
75 Return to themain exercise by pressing F5 and:
76
77 Excel-user: type "A80"
78 Lotus- and Quattro Pro-user: type "A61".
79
80
265
Chapter19
1
B
I E

_4_ Version 2.0 - September 1995
5
6 Current exercise: LINPROG.WK1 Linear Programming
7 Title of case: Cows and/or sheep
8
9 Purpose: 1.Understanding the principles of linear programming.
10 2. Finding the economically best combination of keeping cows
11 and/or sheep,taking two constraints into account.
12 Keywords: Static, constraints,objective function, optimization.
13 Time: Approximately 30min for thebasic principles. Another
14 10min for carrying out the (optional) sensitivity analysis.
IS
16
17
18
19
20 Press PgDn
21
22 LINEAR PROGRAMMING: COWS AND/OR SHEEP CASE
23
24 A farmer has got cows (X),but isthinking of buying some sheep (Y)
25 also; itmight be profitable. (S)hehas totake into account the limited
26 amount of grass and labour (s)he has available.This is an optimization
27 problem that canbe solved by linear programming.
28 Asmentioned before,there are some constraints: labour and grass.
29 There are 30 hectares of grass available.One hectare is sufficient for
30 2 cows or 5sheep.The farmer likes his/her job,but is not awork-
31 aholic. (S)hedoes not want toworkmore than 40hours aweek. One cow
32 will cost 75minutes (=1.25 hours) per week, a sheepwill cost only 9
33 minutes per week.
34
35 We canwrite these constraints in amathematical formulation:
36
37 a x X + b x Y < = c .
38
39 P r e s s PgDn
40
41
42 Enter themissing values of a, b and c (mentioned inthe formula) in
43 the following table.Some of them have already been calculated for you:
44
45 Constraint a b c
46
47 Labour (hrs) 0.15
48 Grass (ha) 0.50 30
49
50
51
52
53
54 There is also the necessity to consider only nonnegative values for
55 our variables X and Y.So:
56
57
58
59 Press PgDn
60
266
I C 1 D I E I
61
62 This is aproblem with two variables (Xand Y) sothe problem can
63 be represented graphically. Any 'action' (X,Y) isequivalent to a
64 point with these coordinates ina standard two-dimensional plane.
65 The constraints restrict the feasible actions to aregion within
66 thisplane.
67
68 Have a look at the graph by pressing <CTRL> G (Excel), <ALT> G (Lotus)
69 or <ALT> C (Quattro Pro).The lines you see are simply the constraint
70 expressions replacing the inequality by an equality. Note that the
71 constraints (1)restrict the region tothe positive quadrant. Pressing
72 any key will bring you back tothis screen.
73 Which area shows the solutions that are feasible forthese constraints?
74 A, B, C or D?Answer in cell F74. | |
75
76
77
78
79 Press PgDn
80
81
82 Till nowwe have forgotten one limitation: the barn for the cows has
83 space for only 40 cows. Does this influence the feasible area of the
84 graph? Y(es)or N(o)? Answer in cell F84: | |
85
86
87
88 The farmer wants tomaximize the total net returns (R).The net returns
89 from cows and sheep are given inthe following table:
90
91 Net returns (US$/year)
92
93 Cows 600
94 Sheep 100
95
96 So, one cowyields the same net returns as six sheep. Ina
97 mathematical formulation:
98 max R =max 600xX + 100x Y.
99 Press PgDn
100
101 The lines for R = 12000and R = 14000 are plotted inthe diagram of
102 feasible actions.These lines give the relationship denoting equal
103 net returns.Press <CTRL> R (Excel), <ALT> R (Lotus)or<ALT> D
104 (Quattro Pro)to have a look atthe graph.
105
106 Isthe following statement T(rue)or F(alse)?
107
108 If an optimal solution exists,an optimal solution can always be
109 found at an angular point of the feasible region of the problem.
110 Answer in cell D U O : | |
111
112
113
114
115 The next stepwe have to take iscalculating the (X,Y)values of
116 these angular points.The feasible area has,inour situation, 4
117 angular points.One of them is (0,0), which is not interesting.
118 Another one isthe point where the 2 constraint lines cross. Besides
119 these there are (0,Y)and (X,0). Here one of the constraints crosses
120 the Y- and the X-axis respectively. Press PgDn
267
Chapter19
B I C I D I E
121 The following table gives theX and Y values of the points where con-
122 straints cross each other or the Y- or X-axis. X(L) and Y(L) and X(G)
123 and Y(G) arethe values of X and Y for the labour and grass
124 constraint respectively:
125 Angular Point X Y
126
127 Y(L)=Y(G) 20 100
128 (0,Y(L)) 0 267
129 (0,Y(G)) 0 150
130 (X(L),0) 32 0
131 (X(G),0) 60 0
132
133 Calculate thetotal net returns of the 3 feasible angular points.
134 (You can have another look atthe graph to find the 3points). What
135 number of cows and sheep isthebest from an economic point of view?
136 Optimal number of cows (cell E136):
137 Optimal number of sheep (cell E137):
138
139
140 Press PgDn
141
142 The value of the objective function forthe 3 feasible angular points:
143
144 Angular points Returns
145
146 X=0 15000
147 Y=0 19200
148 Y(L)=Y(G) 22000
149
150
151 This results inthe following optimal situation:
152
153 X= 20 cows
154 Y= 100 sheep
155
156
157 Thebasic situation isready now.Let us usethe model todo some
158 sensitivity analyses.
159 Press PgDn
160
161
162 SENSITIVITY ANALYSES (optional, 10min)
163
164 The farmer knows quitewell the specific results of the cows on the
165 farm. Butthe estimate of thenet returns fromthe sheep is rather
166 uncertain. Below what value should the farmer change the optimal
167 strategy? The slope of the objective function line is determined
168 by the ratio of the net returns.This ratio also determines which
169 angular point isthe optimal strategy.
170
171 Atwhich slope isthe objective function equal for (20 cows, 100
172 sheep) and (32 cows, no sheep)? A, B, C orD?
173 A. 2.50
174 B. 8.33 Answer in cell F174: | ~|
175 C. -2.50
176 D. -8.33
177
178
179
180 Press PgDn
268
Computer excercisesonanimal healtheconomics
B
181
182 Use this value to calculate the break-even point for the net returns
183 from sheep: Forwhich value of the net return from sheep does the
184 optimal situation change to 'only cows' instead of 'sheep and cows'?
Answer in cell D185: I 1
187
188
189
190 Also calculate the value of the net returns from sheepwhere the optimal
191 situation changes to 'only sheep' instead of 'sheep and cows'. (You
192 first have to find outwhat the slope of the objective function should
193 be inthis situation.)
194 Answer in cell D194: I I
195
196
197
198
199 Press PgDn
200
201
202
207
208
212
214 Supervisors: A.A. Dijkhuizen, R.S.Morris &R.B.M. Huirne
215 (c)Copyright:
218 Hollandseweg 1
220
269
Chapter19

S
6 Current exercise: DYNPROG.WK1 Dynamic Programming
7 Title of case: Sow replacement
8
9 Purpose: 1.Understanding the principles of dynamic programming.
10 2. Finding the economically bestmoment of replacing a sow.
11 Keywords: Dynamic, stage, state,optimization, retention pay-off (RPO)
12 Time: Approximately 30min for the basic principles, after that
13 another 5min for calculating the RPO and/or 10min for a
14 sensitivity analysis.
15
16
17
18
19
20 Press PgDn
21
22 DYNAMIC PROGRAMMING: SOW REPLACEMENT CASE
23
24 Decisions to replace sows areusually based on economic rather
25 than onbiological considerations: the sow is not culled because
26 she isno longer able toproduce but because more isexpected from
27 a replacement sow.
28
29 A pig farmer in a specific area has some general ideas about the
30 optimal sow replacement strategy. It isnot based on calculation,
31 just intuition. (S)hethinks calculation may beworthwhile!
32
33 To simplify the case,we say that a sow can be 4parities old at
34 the most.The returns from a sow depend on the parity she isin.
35
36
37
38 Press PgDn
39
40
41
42 The farmer keeps good records of the sows, so knows exactly
43 what thetypical results onthe farm are for sows in each age
44 category:
45 Parity 1 2 3 4
46
47 Gross Returns - feed costs (US$) 240 320 400 340
48 Slaughter value (US$) 180 190 210 195
49
50 Calculate the average gross returnsminus feed costs per sow on
51 the farm. Let us assume that there is no replacement: all sows
52 are (voluntarily) replaced after parity 4 (answer inA54).
53
54
55
56 Tooptimize sow replacement decisions,we also need to know the
57 purchase price of ayoung sow: 225 (US$).
58
59
60 Press PgDn
270
61
B
T E R
62 Calculate the profit for each parity, including the change in

63 slaughter value of the sows. Enter your answers in the following
64 table:we already calculated one foryou!
65
66 Parity 1 2 3
67
68 Profit I 330|
69
70
71
72
73
74
75 Replacement of sows can be seen as a sequence of decisions taken at
76 a number of stages.Dynamic programming (DP)works from a certain
77 point intime backwards (end of planning horizon) tothepresent. It
78 requires somany steps intime that the starting point (somewhere in
79 the future)does not influence your decision now. Inthis example,
80 we use aplanning horizon of 20time steps. Press PgDn
81
82 In each parity the farmer has to decide to keep or replace the sow.
83 So, there are 20 decision stages.To simplify the situation,we say
84 that a sow can be kept for amaximum of 4parities.Therefore, the
85 states a sow can be in areparities 1, 2,3 and 4.
86
87 The profits per decision (keepor replace the sow) canbe calculated
88 for all parities.After parity 4 (ie,in state 4) a sowwill
89 always be replaced by areplacement gilt (producing her first litter).
90 The profit of replacing a sow isthe slaughter value minus the purchase
91 price plus the [gross returns - feed costs]of a sow in state 1.
92
93 What isthe profit inthe following yearwhen a sow hasbeen replaced
94 after 3parities? Answer in cellG94: | ~|
95
96
97
98
99 Press PgDn
100
101
102 The following table gives an overview of theprofit of keeping and
103 replacing (numbers inbrackets arethe states):
104
105 From/To (1) (2) (3) (4)
106
107 (1) 195 320
108 (2) 205 400
109 (3) 225 340
110 (4) 210
111
112
113 To simplify again,there isno genetic improvement over time and
114 also no discounting, so:
115 Extra returns from replacement sow in state i+1, compared
116 with state idue to genetic improvement (US$): 0
117
118 What istheprofit from adecision inthe long term? Press PgDn
119 to seewhat steps should be taken to answer this question.
120
271
Chapter19
A | B | C | D | E | F | 0 [ H | ]
121
122 We first have to decide what the value of the sows is at the end
123 of our planning horizon (stage 2 0 ) .The best estimation we have
124 till now isthe slaughter value:
125
126 Stage 20
127 State Value
128
129 4 195
130 3 210
131 2 190
132 1 180
133
134 Nowwe go back to decision stage 19:what is optimal,to keep or to
135 replace the sow? The profit of, for instance, keeping a sow in parity
136 2 (=state 2) isthe profit from the sow inthe following parity and the
137 profit from the optimal decision taken at stage 20 for a sow inparity 3
138 (=state 3 ) .Themodel calculates this as:cell E108 + cellC130.
139 Press PgDn
140
141
142 Which cells dowe have to sum to get the profit from replacing a
143 sow inparity 2 (state 2) in stage 19? Choose one of the following
144 options: A. Only cell C108
145 B. Cell E108 + cell C131
146 C. Cell C108 + cell C132
147
148 Answer inD148:
149
150 Compare theprofits from keeping and replacing a sow inparity 2 (state
151 2) at stage 19.What should the farmer decide? K(eep)or R(eplace)?
152
153 Answer inD153:
154
155
156
157 The following tables showtheprofits from replacing and keeping at
158 stage 19 and stages 4to 1and the optimal solution for the different
159 stages. Stages 18to 5are also calculated, but hidden:they have been
160 calculated in the sameway asthe stages shown. Press PgDn
161
162 K indicates keeping tobe optimal,R indicates replacing,K/R
163 indicates keeping and replacing to be indifferent.
164
165
166 Stage 19: State Replace Keep Max K/R?
167
168 4 390 390 R
169 3 405 535 535 K
170 2 385 610 610 K
171 1 375 510 510 K
172
173 Isthe following statement T(rue) or F(alse)? (answer in 1175)
174
175 The output of stage k isthe input for stage k-1. [^
176
177
178
179 Press PgDn
180
272
A | B | C | D | E | F | O 1 H | I | J
181
182
184
185 4 5275 5275 R
186 3 5290 5290 5290 K/R
187 2 5270 5365 5365 K
188 1 5260 5360 5360 K
189
190
191
193
194 4 5570 5570 R
195 3 5585 5615 5615 K
196 2 5565 5690 5690 K
197 1 5555 5685 5685 K
198
199 Press PgDn
200
201
203
204 4 5895 5895 R
205 3 5910 5910 5910 K/R
206 2 5890 6015 6015 K
207 1 5880 6010 6010 K
208
210
211 4 6220 6220 R
212 3 6235 6235 6235 K/R
213 2 6215 6310 6310 K
214 1 6205 6335 6335 K
215
216 We assume that at the beginning of the planning hori zon (stage 1)
217 all the animals are in state 1.What i s the optimal decision in stages
218 1 to 4? (Keepthe sowwhen 'keep'and 'replace' are equal).
219 Compare your answer with the figure on the following page.
220 Press PqDn
221
222 TheOptimal Path is:
223
224 State
225 4 R
226 3 K
227 2 K
228 1 K
229
230 Stage 1 2 3 4
231
232
233 RETENTION PAY-OFF (optional, 5min, sk ip itby press ing PgDn twice)
234
235 The outcome of the model can be used t o estimate the Retention
236 Pay-off (RPO). The RPO isthe total ex tra profit fro m keeping a sow
237 compared with immediate replacement.
238
239 Press PgDn
240
273
Chapter19
I F I G I H I
241
242 Use the values of stage 1to calculate the RPO for sows inparity 1,
243 inparity 2 and inparity 3. (Because all animals are replaced after
244 4 parities,we cannot calculate an RPO for sows inparity 4.)
245
246
Enter your answers inthe following table:
247
248
249
Parity 1 2 3
250
251 RPO:
252
253
254
255
256
257 Press PgDn for some sensitivity analyseswith the DP-model.
258
259
260
261
262 SENSITIVITY ANALYSES (optional, 10min)
263
264 The farmer does not believe that theprevious calculations are suitable
265 for his/her situation. Thepurchaseprice of a sowmay be US$225 on
266 average,but (s)hehas got thebarn and labour available to rear sows
267 himself/herself. The rearing costs thereforewill not exceed US$175 per
268 sow.
269 What isthe optimal path inthis specific situation? Inwhich parity
270 does the farmer have to replace the animals? 1,2, 3or 4?
271
272 Enter your answer in cell F272:
273
274
275
276
277
278
279 Press PgDn
280
281
282 In reality a replacement sowmay be a little better than the older
283 sows, because of genetic improvement.Assume that every replacement
284 sowwill yield net returns that areUS$8 higher than the net
285 returns from areplacement sow in aprevious stage.
286
287 What isthe optimal replacement policy for this farmer (including
288 the lower purchase price)? Parity 1,2, 3or 4? (Change cell H116)
289
290 Enter your answer in cell F290:
291
292
293
294
295
296
297
298 Press PgDn
299
300
274
301
302
305 - return tothe introductory fileby opening the file 'INTROAHE.WK1'
307
308
312
315 (c)Copyright:
318 Hollandseweg 1
320
275
Chapter19
COMPUTER EXERCISES ONANIMAL HEALTH ECONOMICS

= Principles and Applications =
Version 2.0 - September 1995
Current exercise:MARKOV.WKl Markov Chain Simulation

Title of case: (A)Pneumonia in sheep
(B)Mastitis in dairy cattle
9
10 Purpose: 1. (adA) Understanding the principles of aMarkov chain.
11 2. (adB) Comparing different strategies for treating mastitis
12 to find the economically best one.
13 Keywords: Dynamic,transition matrix, state,vector, stable situation.
14 Time: (A)will take about 15min.The first part of (B)takes
15 15min. The second part (optional;dynamic transition rates)
16 takes another 15 min.
17
18
19
20 Press PgDn
21
22 MARKOV CHAIN SIMULATION: PNEUMONIA IN SHEEP
23
24 Ina flock of 90 sheep, 18 are suffering from pneumonia, the other 72
25 are healthy. Once animals are infected, they stay infected for the
26 rest of theyear.After oneyear, 9ofthe sick animals have recovered,
27 but 18of the 72 healthy animals have become infected.
28
29 What isthe probability of a healthy animal being infected next
30 year? (Answer inE 3 0 ) : | |
31 What isthe probability of an infected animal being healthy next
32 year? (Answer inE32): | |
33
34 These 2probabilities areput inthe TRANSITION MATRIX. Complete the
35 matrix:
36 FROM/TO Uninf. Inf.
37
38 Uninf.
39 Inf.
40 Press PgDn
41
42 Multiplying thismatrix by avectorwith the situation inyear 0,
43 results inthe situation inyear 1:
44
45 situation year 0 transition matrix situation year 1
46
47 72 0.75 0.25 63 27|
48 HJ 0.5 0.5
49
50 Summarized foryears 0 to 4:
51
52 Year Uninf. Inf.
53 0 72 18
54 1 63 27
55 2 61 29
56 3 60 30
57 4 60 30
58
59 Press PgDn
60
276
C | D | E | F | G | H |
61
62 As you can see,after acouple ofyears,the number of uninfected
63 animals does not change any more;a steady state hasbeen reached.
64
65 Determine the steady statewhen atthe start 75 animals are
66 infected. Change the value in cellB47.
67
68 Enter your answers in F70 andF71:
69
70 Number of infected animals:
71 Number of uninfected animals:
72
73
74
75
76
77 More about the steady state on thenextpage.
78
79 Press PgDn
80
81
82 The steady state seems to be independent of the initial situation.
83 Now we have found a steady state after somemultiplications. It
84 is also possible to calculate the steady state at onceby solving
85 the following equations:
86 0.75 x (% Uninf.) + 0.5 x (% Inf.)= % Uninf.
87 0.25 x (% Uninf.) + 0.5 x (% Inf.)= % Inf.
88 % Uninf. + % Inf. =100%
89
90 Solving this problem results in: 33.33 % Infected
91 66.67 % Uninfected
92
93 Thetwo states in this model are called recurrent.Another possi-
94 bility isthat one of the states is absorbing: letus assume that
95 an animal that has been infected once,will never be freeof the
96 disease again.
97
98 Goto the nextpage to complete thetransitionmatrix for this
99 situation.
100 Press PgDn
101
102 Enter the correct values inthe transition matrix:
103
104
105 FROM/TO Uninf. Inf.
106
107 Uninf.
108 Inf.
109
110
111 Inthis case 'infected' is an absorbing state:once an animal has
112 reached this state, itwill never leave it again.
113 The state 'uninfected' isnow atransient state: a sheep that
114 passes this state,will never come back to it again. In this
115 situation all sheep will be infected eventually, independent
116 of the initial situation. Sothe steady statewill be:0unin-
117 fected and 90 infected.
118 Now we extend the model with an extra state: immune.
119
120 Press PgDn
277
Chapter 19
121
122 The transition matrix isgiven:
123
124 FROM/TO Uninf. Inf. Immune
125 Are the different
126 Uninf. 0.5 0.25 0.25 states absorbing(A),
127 Inf. 0 a 0 transient (T)or
128 Immune 0 o 1 recurrent (R)?
129
130 (NB: drawing atransition diagram might be useful and illustrative).
131 A, T, R?
132 Uninf.
133 Inf. :
134 Immune:
135
136 How many animals (from atotal of 90)will eventually be infected when
137 atthe start all sheep are uninfected? (cell H137): | ~|
138
139
140 Press PgDn
141 Isthis steady state independent ofthe initial situation? Y(es) or
142 N(o)? (answer in E142): | "|
143
144
145
146 The next case isan example of amatrix with only recurrent states:
147
148 MARKOV CHAIN EXAMPLE: MASTITIS
149
150 A dairy farmer has someproblems with the animals: a lot of them
151 suffer frommastitis,so (s)he asksyou for advice.At the moment the
152 herd consists of the following animals:
153
154 Initial herd: Uninfected 240
155 Strep, agalactia 15
156 Strep, spp. 15
157 Staphylococcus 22
158 Other infections 8
159 TOTAL 300 Press PgDn
160
161
162 A Markov Chain transition matrix isgiven.Each cell represents the
163 annual probability of transition from different states on the left-
164 hand side of thematrix to states appearing over the matrix.
165
166 Strep, Strep, Other
167 FROM/TO Uninf. ag. spp. Staph. Inf. Culled SUM
168
169 Uninfec. 0.52 03 .02 0.12 .02 0.29 1.00
170 Strept ag. 0.70 01 0 0 0 0.29 1.00
171 Strept spp. 0.70 0 .01 0 0 0.29 1.00
172 Staph. 0.10 0 0 0.40 0 0.50 1.00
173 Other infec. 0.71 0 0 0 0 0.29 1.00
174 Culled 1.00 0 0 0 0 0 1.00
175
176 Calculate the number of Staphylococcus infections inyear 1.
177 Enter your answer in cell G177: |
178
179
180
278
B
181
182 The transition matrix isused to calculate the situation on
183 the farm over a couple of years.The results are given in the
184 STATE MATRIX:
185
186 Strep. Strep. Other
187 Time Uninfec. ag spp. Staph, infect. Culled TOTAL
188
189 0 240 15 15 22 0 300
190 1 154 7 5 38 92 300
191 2 187 5 3 33 68 300
192 3 177 6 4 36 74 300
193 4 179 5 4 36 73 300
194 5 178 5 4 36 73 300
195 6 178 5 4 36 73 300
196 7 178 5 4 36 73 300
197
198 As you can see,quite a lot of animals suffer from Staphylococcus.
199 After a couple of years a steady state is reached.
200 Press PgDn
201
202 There are different options of changing the present situation:
203
204 1. Using antibiotics for dry-period treatment of the animals.
205 25% of the animals with Staphylococcus will be clean the next
206 year, instead of 10%.25% instead of 40%remain infected with
207 Staphylococcus.
208 2. Bringing the number of new Staphylococcus infections down by some
209 extra care for hygiene. Instead of 12%new infections, 4% of the
210 clean cowswill suffer from Staphylococcus the next year.
211
212 Create the transition matrix for the first strategy. You can do
213 this by changing the values inthe original transition matrix.
214 Check the last column inthe matrix: the summation of all proba-
215 bility ratesmust equal 1!
216
217 The STATE MATRIX gives you the new situation.Make sure you write
218 down the steady state situation, because you need it later.
219 Make the probabilities equal again tothe default values and
220 recalculate strategy 2. Press PgDn
221
222 The losses due tomastitis are:
223 Streptococcus ag. 260 (US$per infected cowper year)
224 Streptococcus spp. 260
227
228 Cost of Culling 340 (US$per culled cow)
229
230 The costs of the different strategies are:
231 Strategy 1 (US$per year) 1900
232 Strategy 2 (US$per year) 2500
233
234
235 These values can beused to calculate the costs for the different
236 strategies. You can fill inthe number of animals suffering from
237 the different bacteria (inthe steady state) inthe scheme on the
238 next page.You also have to fill inthe number of animals culled.
239
240 Press PgDn
279
Chapter 19
A | B | C | D | E | F | O | H | I
241
242 Number of animals suffering from:
243 Costs Total
244 Strategy: Str ag. Str spp. Staph. Other Culled Strat. Costs
245
246 Notreatment 0 0
247 Strategy 1 1900 1900
248 Strategy 2 2500 2500
249
250 Themodelmultiplies thesevalues by the costs as defined
251 previously, and calculates the total costs.
252
253 What would you advise the farmer?
254
255 Best strategy (Fill inNo or 1or 2 in cell H255): | |
256
257
258
259
260
261
262
263 DYNAMIC TRANSITION RATES (optional, 15 min)
264
265 Nowwe assume that the number of animals infected with Streptococcus
266 agalactia depends on the number of animals uninfected or infected with
267 Streptococcus agalactia during the previous year. The probability of
268 anuninfected animal becoming a new Streptococcus agalactia case was
269 calculated astheprobability of anuninfected animal not avoiding
270 effective contact with all cases present inthat year.
271
272 Inthis situation a fixed (static)transition matrix is insuf-
273 ficient.A second transition matrix is constructed.
274
275 Have a look at thismatrix on the nextpage.
276
277
278
279 Press PgDn
280
281
282 TRANSITION MATRIX:
283 Strep. Strep. Other
284 FROM/TO Uninf. ag. spp. Staph. Inf. Culled SUM
285 Uninfec. X Y 0.02 0.12 0.02 0.29 1.00
286 Strept. ag. 0.70 0.01 0 0 0 0.29 1.00
287 Strept. spp. 0.70 0 0.01 0 0 0.29 1.00
288 Staph. 0.10 0 0 0.40 0 0.50 1.00
289 Other inf. 0.71 0 0 0 0 0.29 1.00
290 Culled 1.00 0 0 0 0 0 1.00
291
292
293 X = 1- summation (D285 to H285)
294 Y = 1-0.995tothe power of(no. of strep, ag. inprevious year)
295
296 These values can change over time,making the transition probabilities
297 dynamic. Inthe statematrix the values are given per year.
298
299 We first need todefine the initial herd. Press PgDn
300
280
A | B | C | D | E | F | G | H | I
301
302 Initial herd: Uninfected 240
303 Strept. ag. 15
304 Strept. spp. 15
307
308 Calculate X and Y foryear 1 (giveyour answer intwo decimal places
309 inD310 and D311):
310 X=
311 Y=
312
313 Consider the following statement:
314
315 Y isalwayshigher in aherd with ahigh percentage of animals
316 suffering from Streptococcus agalactia than in a herd with a smaller
317 percentage suffering from Streptococcus agalactia.
318
319 T(rue)or F(alse) (inF31Ï »)? 1 1
320
321
322
323
324
325 In the STATE MATRIX the situation isgiven over some years. X and
326 Y are calculated and given for every year first:
327
328 Strept. Strept. Other
S
329 Time X Y Uninf. ag. PP- Staph. inf. Culled
330
331 0 ** ** 240 15 15 22 8 0
332 1 0.48 0.07 143.50 17.53 4.95 37.60 4.80 91.62
333 2 0.47 0.08 181.38 12.25 2.92 32.26 2.87 68.33
334 3 0.49 0.06 173.16 10.92 3.66 34.67 3.63 73.96
335 4 0.50 0.05 176.22 9.34 3.50 34.65 3.46 72.83
336 5 0.50 0.05 176.61 8.15 3.56 35.01 3.52 73.15
337 6 0.51 0.04 177.42 7.15 3.57 35.19 3.53 73.14
338 7 0.51 0.04 178.00 6.32 3.58 35.37 3.55 73.18
339
340 Press PgDn
341
342 Assume that not 15but 65 animals are infected with Strept.ag. in
343 the initial situation.Will Y be higher or lower inyear 1than
344 intheprevious situation?
345
346 Enter your answer in cell H346; H( igher)or L(ower): | |
347
348
349
350
351
352 What doyou think will happen over a7-yearperiod:will Y remain
353 completely different fromthe Y inthe previous situation or not?
354 Check your answer by filling inthe new situation inthe defined
355 initial situation (cellsE302 to E306). (Theherd size has not
356 changed, soyou havetobring the number of uninfected animals
357 down.)
358
359 Press PgDn
360
281
Chapter19
361
362
367
368
372
373 Design: C.W. Rougoor £A.W. Jalvingh
374 Supervisors: A.A. Dijkhuizen, R.S.Morris &R.B.M. Huirne
375 (c)Copyright:
378 Hollandseweg 1
380
282
B E
1
5
6 Current exercise: MONTCAR.WK1 Monte Carlo Simulation
7 Title of case: Aujeszky's disease in swine
8
9 Purpose: 1.Understanding Monte Carlo simulation.
10 2. Simulating the number of animals infected with Aujeszky's
11 disease in a herd and its financial effect over time.
12 Keywords:Dynamic, random sampling, simulation.
13 Time: Approximately 30min for themain exercise.Another 10min
14 for the optional exercise (different initial situation).
IS
16
17
18
19
20 Press PgDn
21
22 MONTE CARLO SIMULATION: AUJESZKY'S DISEASE
23
24
25 Assumethe following transition matrix with 3possible states an
26 animal canbe in:
27
28 From/to| SUM
29
30 0.60 0.38 0.02
31 0.05 0.85 0.10
32 0.03 0.87 0.10
33
34 where: A =hogs are healthy
35 B =hogs are infected with Aujeszky
36 C = hogs infected with Aujeszky and secondary infections
37
38 Number of hogs of a farmer: 40
39 Press PgDn
40
41
42 A Markov chain demands an initial herd.Assume that inperiod 0 all
43 animals are healthy.
44 A Markov chain calculates the situation inthe next period as:
45
46 A B C
47
48 Period 1 24.00 15.20 0.80
49 Period 2 15.18 22.74 2.08
50
51 A Markov chain can also be used to calculate a stationary situation.
52 In thiscase:
53 A B C
54
55 Stationary: 4.28 32.06 3.66
56
57 Monte Carlo simulation determines the situation in the next period
58 by random sampling for each hog.Let us simulate the situation in
59 period 1.
60 Press PgDn
283
Chapter 19
B l C D E F O B
61
62 Themodel will draw arandom number between 0 and 1.When the number
63 is lower than or equal to 0.60, the hog will be in stateA.When the
64 number is higher than 0.60 but lower than or equal to 0.98, the hog
65 will be in state B, etc.This corresponds with the first row of the
66 transition matrix. Cell B71 shows the number drawn,cell C71 the
67 corresponding state.
68
69 Random State
70
71 0.4382 A
72
73 The farmer has 40 hogs, sowe have tomake 40 iterations:
74
75 Number of iterations: 40
76
77 Now you can press <CTRL> S (Excel-user) or <ALT> S (Lotus-andQuat-
78 tro Pro-user)to start the simulation.Lotus and Excel-user: look at
79 cells B71 and C71:you will see the changing of number and text
80 depending on the state the hog is in. Press PgDn
81
82 Quattro Pro does not update these cells after each iteration. The
83 outcome appears in the following table.To see the effect of the
84 random sampling,we can domore replicates.
85 Press <CTRL> or<ALT> S again: cell C88will change to 2;the second
86 replicate. Go ontill the table is completely filled.
87
88 Replicate number 0
89 REPLICATE
90 State 1 2 3 4 5 Avg % SD of %
91
92 Ä Ö (5 Ö Ö 0 0.00 0.00
93 B 0 0 0 0 0 0.00 0.00
94 C 0 0 0 0 0 0.00 0.00
95
96 To get a clear view of the differences between the replicates, you
97 can have a look at agraph with the 5replicates.Press <CTRL> G
98 (Excel),<ALT>G (Lotus)or<ALT> Q (Quattro Pro).The 5 replicates
99 may differ considerably. Pressing any key will bring you back to
100 this screen. Press PgDn
101
102 What ifthere are 250hogs instead of 40?
103
104 Let us repeat the simulation with 250 hogs: change cell D75 to250.
105 Press <CTRL> R (Excel-user) or <ALT> R (Lotus-and Quattro Pro-user).
106
107 Replicate number 0
108
109 REPLICATE
110 State 1 2 3 4 5 Avg % SD o f %
111
112 Ä Ö Ö Ö 5 0 0.00 0.00
113 B 0 0 0 0 0 0.00 0.00
114 C 0 0 0 0 0 0.00 0.00
115
116 Themodel calculates the average percentage of animals inthe different
117 states and also the standard deviation of this percentage (last columns
118 of the tables;these values are only meaningful when all replicates are
119 done). Compare the standard deviations for 40 and 250 iterations.
120 Press PgDn
284
121
I I I E I
122 Let us return tothe farmerwith only 40 hogs. Till now,we have only
123 looked at period 1.We alsowant to knowwhat happens over time,
124 for instance 7periods.Let us start with an average situation.
125 The situation inperiod 0 is sampled from the stationary situation
126 calculated with theMarkov Chain (cells C55 toE55):
127
128 Situation hog
129
130 Period Change cell D75 again to 40
131 Period iterations. Press <CTRL> P (Excel)
132 Period or<ALT> P (Lotus and Quattro
133 Period Pro)to simulate the 7periods.
134 Period
135 Period
136 Period
137
138 The results of this simulation appear on the next page.
139
140 Press PgDn
141
142 Replicate number
143
144 Period
145 State 1 2 3 4 5
146
147
148
149
150
151 The model has simulated the situation over 7periods foreach hog.
152 The situation inperiod idepends on the situation in period i-1.
153 We use the probabilities from thetransition matrix defined at the
154 beginning of this exercise. Therefore,when inperiod 2 ahog is
155 in state B,the probabilities belonging to state Bwill beused in
156 period 3.
157 (Remember:this isdifferent from theprevious situation: there we
158 did 5 independent simulations for 1period, herewe only do 1
159 simulation,but for 7different periods).
160 Press PgDn
161
162 Have a look at the graph that shows the distribution over time of your
163 last simulation: Press<CTRL> F (Excel) ,<ALT> F (Lotus)or <ALT> W
164 (QuattroPro).
165
166 What would the situation over time be ifwe had used aMarkov Chain
167 instead of aMonte Carlo simulation and the stationary situation was
168 the initial situation? A, B or C?
169 A. Exactly the same situation inperiod 0 aswith Monte Carlo, but
170 a smooth line to the situation inperiod 6.
171 The graph would show 3horizontal, stable lines.
172 The situation over timewould be exactly the same as with
173 Monte Carlo.
174
175 Answer in cellD175: JPress<F9> after you have given the
176 answer.
177
178
179
180 Press PgDn
285
Chapter19
I D I E
181
182 FINANCIAL LOSS
183
184 Let us assume that the financial loss from Aujeszky's disease can be
185 quite high,especially when owing to the disease,other infections occur.
186 Assume that the costs of the disease are:
187
188 US$per hog per period
189
190 Aujeszky only: 20
191 Aujeszky and sec. inf.: 150
192
193 Calculate the costsof the disease inperiod 6 for this farmer.
194 Answer in cell D194: | |us$.Press <F9> after you have
195 given the answer.
196
197
198 Repeat the simulation 4times by changing the replicate number to
199 zero (cell C142), press <ENTER> and <F9>. Thetable is cleared now.
200 Press PgDn
201
202 You canpress <CTRL> or <ALT> P again for a replicate.
203 For every replicate you can look atthe graph by pressing <CTRL> F
204 (Excel),<ALT> F (Lotus)or<ALT> W (QuattroPro).
205
206 Calculate the costs of the disease for all replicates and compare
207 thecosts.
208
209 OPTIONAL EXERCISE (10min)
210
211 Inthe calculations over time,the situation in period 0was sampled
212 from the stationary situation.Assume that the farmer is sure that
213 the farm istotally free of the disease at themoment.All animals
214 are then in state A.
215
216 Simulate the situation for periods 1to 6. You can do this by
217 changing cell C130 in 'A' (all animals are in stateA inperiod0 ) .
218
219 Press PgDn
220
221
222 Have a look atthegraph bypressing <CTRL> F (Excel), <ALT> F (Lotus),
223 or <ALT> W (QuattroPro).
224 What graph doyou expect when the number of animals ismuch higher?
225
226 You can see the effect of an increasing number of animals as follows:
227
228 Change after a simulation the replicate number to zero but do not
229 press <F9>. Thetable isnot cleared. Press <CTRL> or <ALT> P: the
230 simulation will be repeated and the number of animals inthe 3 states
231 arethetotal number of 2 simulations.Have a look atthe graph.
232 You can repeat this asoften asyou like: atthe end you get a very
233 smooth graph.
234
235
236
237
238 Press PgDn
239
240
286
Computer excercisesonanimalhealth economics
241
242
245 - return tothe introductory fileby opening the file 'INTROAHE.WK1'
247
248
252
255 (c)Copyright:
258 Hollandseweg 1
260
287
Chapter19

5
6 Current exercise: DECANAL.WK1 Decision Analysis
8
9 Purpose: Comparing different strategies totreat displaced
10 abomasum, taking risk into account.
11 Keywords: Static,expected monetary value,maximin,minimax,maximax,
12 utility. Bayes'theorem, value of information.
13 Time: Total time necessary 60min, including 15min for utility,
14 and 20min forvalue of information. Both areoptional.
15
16
17
18
19
20 Press PgDn
21
22 DECISION ANALYSIS:DISPLACED ABOMASUM CASE
23
24 Left-displaced abomasum can be treated effectively by several
25 surgical techniques. Inthis example wewant to compare 'normal'
26 surgery (such as left-flank abomasopexy, strategy al)with 'closed'
27 surgical techniques (suchasthe bar suture technique, strategy a2).
28 A third possibility isnot treating the cowbut taking her to the
29 slaughterhouse (strategy a3) immediately.
30
31 These 3 strategies entail different costs and returns.When the
32 cow is treated, shemight not recover. Forboth treatments this
33 probability is 20%.Inthat situation the cow has to be removed
34 immediately.Meat of animals treated with antibiotics is expected
35 tobe condemned in 10%of the cases after surgery al and in80%
36 of the cases after surgery a2, losing the slaughter value of
37 the animal.
38
39 Press PgDn
40
41
42 The different values are:
43 Slaughter Value (SV): 800 (US$)
44 Cost of Culling (COC): 400 (US$)
45 Surgery Costs al (SCal): 215 (US$)
46 Surgery Costs a2 (SCa2): 100 (US$)
47
48 The cost of culling isthe amount of money you save,by keeping the cow
49 instead of replacing her.
50
51 Payoff of the different strategies can be calculated as:
52 No surgery: SV
53 Surgery:
54 Success: SV+COC - SCa(i)
55 Failure: proportion not condemned x SV- SCa(i)
56
57
58
59 Press PgDn
60
288
Computer excerciseson animal health economics
61
62 The following table shows the payoff of the different strategies:
63
64 Strategy
65 States P(state) al a2 a3
66
67 Success 0.8 985 1100 800
68 Failure 0.2 505 60 800
69
70 One criterion most often used to verify which strategy isthebest,
71 istheExpected Monetary Value (EMV). The EMV istheweighed average
72 of the payoffs.Calculate the EMV for allthe strategies.
73
74 What isthe optimal strategy according to theEMV? al,a2 or a3?
75
76 Answer in cell D76: | |
77
78
79
80 Press PgDn
81
82 TheEMV is summarized inthe following table:
83
84 Strategy
85 al a2 a3
86
87 EMV 889 892 800
88
89 The outcomes of the 2 surgery strategies are uncertain. TheEMV impli-
90 citly assumes decision makers to be risk neutral.Thismeans that the
91 EMV does not differentiate, for instance,between US$100 for sure,and
92 US$200 or 0with a 50/50% probability. There are different criteria
93 available that do take risk attitude into account.
94
95 Themaximin criterion arises from avery pessimistic risk attitude.
96 Each action is judged on itsworst payoff.What isthe optimal
97 strategy according to this criterion? (Cell G97) |
98
99 Press PgDn
100
101
102 Theminimax regret criterion compares the amount bywhich the payoff
103 could have been increased had the decision maker known what the
104 result of surgery would be. What isthe optimal strategy according
105 to this criterion? Answer in cell F105: | |
106
107
108
109 A third criterion is atotally optimistic one:Themaximax criterion
110 simply amounts to scanning the payoff matrix to find its largest
111 value. This criterion totally ignores all other payoffs. It is
112 very much the approach of the desperate gambler.What is in our
113 example the optimal strategy according to themaximax criterion?
114 al, a2or a3?Answer in F114: | |
115
116
117 The difference in outcome of these 3 criteria arises from a different
118 risk attitude.A very important thing these criteria do not take into
119 account is any difference inprobability of the outcome.
120 Press PgDn
289
Chapter19
A | B | C | D | E | F | G
121 UTILITY (optional,15min, skip itby pressing PgDn 4 times)
122
123 Amethod that includes both probability of the outcome and risk
124 attitude isthe expected utilitymodel.The choice criterion is
125 maximization of the utility. Theutility integrates information about
126 a decision maker's preference and subjective expectation in order
127 to identify preferred choices underuncertainty. Themost direct way
128 tomeasure preferences isto estimate a decisionmaker's utility
129 function. This function relatesthepossible outcomes of a choice
130 to a single-valued index of desirability.
131
132 Assume in a lottery the chance of winning US$20000 or winning
133 nothing is 50/50. Ifthedecisionmaker preferred apayment of
134 US$7000 for surethen:
135 A. The decision maker is foolish.
136 B. The decision maker isriskaverse.
137 C. The decision maker isrisk taking.
138
139 Answer inC139:
140
141
142 A utility function makes itpossible to convert themoney values for
143 each of the alternatives into utility values.
144 Suppose that a farmer's utility function for gains and losses is
145 adequately represented by:
146 Utility function: U(x)=x - (x"2)/4000
147
148 Calculate theutility ofUS$100,500 and 900 forthis farmer. Enter
149 your answer inthe following table:
150
151 100 500 900
152
153 Utility
154
155 Does this farmer prefer US$500 for sure (a)or does (s)heprefer the
156 uncertainty of 50%/50% probability of US$100 /US$900 (b)? Use
157 the values calculated above and answerwith aorb incellA158.
158
159
160 Press PgDn
161
162 Isthis farmer risk averse (a)or risk taking (t)?
164
165 Read the following statements.
166 Which answer iscorrect:A or B (orC or D)?
167
168 1.A risk-neutral decision maker:
169 A. Cannot haveautility function.
170 B.Will come to the same conclusion by utility asby EMV.
172
173 2. Utility:
174 A. Reflects the attitude of the decisionmaker.
175 B. Is anumber.
176 C. Isuseful to givemeaning to extreme monetary values.
177 D. All of the above answers are correct.
179
180 Press PgDn
290
Computerexcercisesonanimalhealtheconomics
181
182 The utility function isused to calculate the utility for the
183 3 strategies inthe abomasumcase:
184
185 Utility
186 S(i) U(allsi) U(a2|si) U(a3|si)
187
188 Success 742.44 797.50 640.00
189 Failure 441.24 59.10 640.00
190
191 Exp. U 682.20 649.82 640.00
192
193 Which strategy isthe best option forthis farmer? al, a2 or a3?
194 Answer in cell D194: | 1
195
196
197
198 So fartheuse of utility; let us return to themonetary value:
199
200 Press PgDn
201
202 EXTRAOPTION:VALUEOF INFORMATION (optional,20 min)
203
204 The farmer askstheveterinarian to predict the result of
205 surgery.Theveterinarian warnsthe farmer that the predictions
206 are not always correct,but correct or not,the farmer hasyet to
207 pay for it.
208
209 Price prediction: 15 (US$)
210
211 The next table showsthe total profit with theprice of a
212 prediction included:
213 Strategy
214 States P(state) al a2 a3
215
216 Success 0.8 970 1085 785
217 Failure 0.2 490 45 785
218
219 EMV 874 877 785
220 Press PgDn
221
222
223 The prediction canbe z(l),which means that most probably surgery
224 will be successful,or z(2),which indicates failure of surgery.
225 On the next page youwill find atable with the likelihoods of the
226 various signals of theprediction (z(l)and z(2)) relative to the
227 possible states (successor failure).
228
229
230 Thesevalues areused to calculate the joint probability, this is
231 the probability ofboth being in a certain state and getting a certain
232 prediction: P(z(i) and S i ) .Thisvalue isnecessary to calculate
233 the posterior probability: thechance of a specific state,given a
234 specific prediction.
235
236
237 Press PgDn to have a look atthistable.
238
239
240
291
Chapter 19
241 I
242 P{z(k)|state(i)} Joint Probabilities
243 States P(state) z(l) z(2) z(l) z(2)
244
245 Success 0.8 0.8 0.2 0.64 0.16
246 Failure 0.2 0.4 0.6 0.08 0.12
247
248 P{z(k)} 0.72 0.28
249
250 Post. Probabilities
251 States P(Si|zl) P(Si|z2)
252
253 Success 0.89 0.57
254 Failure 0.11 0.43
255
256 What isthe probability of success when the veterinarian predicts
257 that surgery will fail (z(2))? (Cell G257): [ ~
258
259
260
261
262 With theseposterior probabilities and themonetarypayoffs,we can
263 calculate themonetary value of each action, just by multiplying the
264 payoffs by the posterior probabilities and summing them.
265
266 What isthemonetary value of alwhen the result of the prediction is
267 z ( D ?
268 Answer incell D268: I
269
270
271
272
273 The table on the next page lists the EMVs of the different strategies
274 for thedifferent predictions (NB:dueto the posterior probabilities
275 being rounded off,your hand-calculation might be slightly different
276 from these values).
277
278
279 Press PgDn
280
281 z(l) z(2)
282
283 E[a(j)|z(k))i al 916.67 764.29
284 a2 969.44 639.29
285 a3 785.00 785.00
286
287 Optimal strategy: a2 a3
288
289 What isthe expected monetary value of the strategy of asking for a
290 prediction? To answer this question you have totake the probability
291 of the different predictions into account (you can find them in cells
292 F248 and G248), and multiply them by the EMVs of the optimal
293 strategy. So:EMV of Bayes' strategy = 917.80
294
295 This value has to be compared with the value of the optimal decision
296 without aprediction (cells C87 to E87).Was the prediction worth its
297 money? Y(es) or N(o)? Answer in cell F297: | |
298
299
300 Press PgDn
292
B I C I D I E
301
302 Theveterinarian has got the ideathat thepredictions are very
303 useful: (s)hebelieves a farmer iswilling to pay US$50.
304 Do you agree? Y(es)or N(o)? Cell F304: | |
305
306
307
308 Till nowwe have assumed that strategies al and a2both have aproba-
309 bility of 0.2 of failure. In fact,the probability of failure is 0.25
310 for strategy a2 and 0.15 for strategy al.Besides surgery or culling,
311 there is a fourth strategy not taken into account yet:rolling the
312 cow to effect physical abomasum replacement. Thismethod has a high
313 rate of recurrence of the condition and a lower rate of recovery (0.30),
314 but itmay be preferred because it isnoninvasive and inexpensive.
315 Decision-tree analysis is amethod that candealwith different
316 probabilities, and itgives a clear overview of thepossibilities.
317
318 There is an exercise available on decision-tree analysis. Instructions
319 can be found inthe introductory file INTR0AHE.WK1.
320 Press PgDn
321
322
325 - return to the introductory file by opening the file 'INTROAHE.WK1'
327
328
332
334 Supervisors: A.A. Dijkhuizen,R.S.Morris SR.B.M. Huirne
335 (c)Copyright:
338 Hollandseweg 1
340
293
Chapter 19
Decision-tree analysis:the program SMLTREE1

After you have started the program, you must load the tree from the file DECTREE,
available on the directory where you have put the computer exercises on animal health
economics. You can see alist of names of branches included inthe model. Choose the
branch CHOOSE (just bypressing Enter);this isthefirstbranch of the tree.The program
does notshow thewholetree onthe screen.Use '+', tobring youonelevel deeper intothe
tree. Ifyou want to see the entire tree (5 levels) keeppressing '+'. This is what you will
see eventually:
success1
I coc+sv-costl
0.85
0 = Chancenode
faille | =Decision node
-Q i -costl
0.015 • =Terminal node
faillnc
I sv-costl
#
Choose-É sued.2 i coc+sv-cost4-costl

0.85
recur -1.2 1 fail1.2c

-cost4-costl
0.5 0.015
keep faill.2n
-Q sv-cost4-costl
success4 norecur i coc+sv-cost4

#
0.3
replace
Ó • sv-cost4
fail4nc
i sv-cost4
#
Twobranches of the displaced abomasum tree have already been made for you: strategy
al andstrategya4.CHOOSEisadecisionnode:thisisshownbyaclosedrectangle(|). The
different strategiesarechancenodes:representedbyanopencircle(O).Besidesthese,there
are alsoterminal nodes (small closed squares, • ) ,they form thelastpart of atree.
The following names areused inthistree:
success1 =strategy al is successful
faille =strategy al failed andthe meat iscondemned
faillnc =strategy al failed but the meat isnot condemned
' If you do not have the program SMLTREE available, you can draw the tree by hand and calculate the
answers by hand. However, questions 5to 8cannot be answered without SMLTREE.
294
coc =costsofculling
sv =slaughter value
costl =thecostsof strategy al
1.2 =strategy al willbeused asasecond option
Let us have alook atthe tree.Westart with strategy al (move through the tree by using
thebackspace key,Ctrl PgUp,Ctrl PgDn,TAB,arrow keys andby typing numbers.If you
move from left toright,typing 1 andpressing Enterwillbring youtothefirstbranchetc.):
The probability of success is0.85.Themonetary value of thisbranch isthecost of culling
(coc)+theslaughtervalue(sv)-costsofstrategyal (costl).SMLTREEhasthepossibility
of entering the monetary value as alogical expression of variables.Before analysing the
tree, the model will ask you to assign values tothese variables.As you can see, we now
distinguish between condemned and not-condemned meat. The probability of meat being
condemned is 10%,theprobability of failure is 15%.Therefore, theprobability of failure
andcondemnedmeatis0.10x0.15.Aprobability of#meansthattheprogramwillcalculate
theprobability for you (= 1 -otherprobabilities).
Strategy a4:
When strategy a4issuccessful, thefarmer candecidetokeepthecowbutcanalsodecideto
replace her when (s)he does not want to take the risk of recurrence of the displaced
abomasum.Whenthecowiskept,thereisaprobability of50%thatthedisplacement inthat
particularcowwillrecur.Weassumethatthefarmerchoosesstrategyal thesecondtimethe
displacement occurs ((s)he has lost faith in strategy a4).The last part of the tree is the
same asfor strategy al. Theonlydifference isthemonetary value:thecostsof strategy a4
are alsotaken into account.
1. Analyse what the farmer should decide after (s)hehaschosen strategy 4 and the 'rolling'
being successful: keep or replace? Youcan dothis by highlighting 'success4' with your
cursor (youalwayshavetobeonabranchnametoworkwiththemodel),type 7','Analyze',
choose theoption 'Foldback'. Givethevaluesof coc,sv,cost4 andcostl (incase youhave
forgotten: coc=400,sv=800,cost4=60,costl =215).
2. Add strategies a2 anda3tothetree.Putyourcursoron 'choose',type 7', 'Edit tree', 'Add
node', 'After current node', use the arrow keys toput the branch in the right place in
between the otherbranches,press <INS>. Give aname tothe branch (give every branch a
unique name of maximum 8characters). Define the node type. Be aware of the fact that
thenodetypeasked foristhenodetypefollowing thisbranch('1' isachancenodebecause
after you have chosen 1,there is achance of success and achance of failure). There are
different possibilities:
D=decision node
T =terminal node
C=chance node
The other possible nodetypes aremore advanced andnot necessary for thistree.
295
Chapter 19
Asstatedinthespreadsheet model,theprobability offailure is0.25 for strategy a2.Incase

of failure, meat with antibiotics isexpected tobe condemned in 80% of the cases after
strategy a2.Goon adding thesebranches till you have completed your tree. (If you have
made amistake, for example,haveentered the wrongnodetype,just assign avalue tothe
variablestheprogram asksfor. Then,when youarebackinthemenu,put thecursor onthe
appropriate termandeditthetree).
3. Determinetheoptimaldecisionbyanalysingthecompletemodel(thewayyouanalysedpart
ofthemodel before).
What istheExpected Monetary Valueof strategies al, a2,a3anda4?
Sensitivity analysis (optional,20min)

Culling isnot avery good alternative,asyou mayhave noticed. Wemade this calculation
for an average cow, however. There are also cows for which culling is, economically
speaking, abetter alternative than treating,becausetheyperform below average.
4. What variabledowehavetochangetosimulatecowsthatproduce below average?

If you do not have the program SMLTREE available, you cannot do these sensitivity
analyses.
5. Findthethresholdforthisvariable:type 7', 'analyze', 'threshold',comparestrategyal (the

beststrategyonaverage)withculling(=strategya3)(Youcanfindthiscomparison withthe
arrow keys.) Enter the name of the variable (coc).Make the minimum and maximum of
the variable0and 1000.What doesthecalculated threshold mean?
Now the program asks for avariable for 2-way analysis.Wewant to see the influence of
theprice of strategy al onthethreshold of thecoc:what is,for instance,thethreshold of
thecoc whenthepriceof strategy al isUS$300instead of US$215?A2-way analysiscan
answerthis question!Thus:
6. Enter 'costl', enter 0500 10for min,max and step.PressEnter (wedonot want to dothe
3-wayanalysis).Giveacharacterforthegraph,forexample '#'.Type 'g' toviewthegraph.
Canyouexplain what yousee?
'Rolling' (strategy a4)isnotprofitable becauseofthelowrateofsuccess.How greatisthe
effect of the rate of success ontheprofitability? Sensitivity analysis can give an answer to
this question.Wefirsthavetochangetheprobability valuetoavariable:
7. Putthecursoron 'success4'.Thenpress 7', 'edittree',and 'probability'.Nowyoucanenter
aname for this new variable (for instance:prob4),delete theexisting value and save with
'Y'.
Now wecanperform asensitivity analysis onthisnewvariable:
8. First clear the old graph by pressing 'C'. Move the cursor back to 'choose', press 7',
296
'analyze', 'sensitivity analysis' and the name of the variable. Now you have to give a
minimumandmaximumvalueforthevariableandthesizeofthestep;presstheEscapekey
toclear andthen entersomereasonablevalues.PressEnter.
Scrollthroughthe screen toseeatwhat level ofthevariable 'rolling' youcanfindthemost
optimal decision.Press Gtohave alook atthegraph.
Canyouexplain whatyou see?
19.5 Answers
Production function (filename:PRFUNCT1.WK1)
E94 Totalveterinary costs=20visits xvariablecostspervisit + fixed costsperyear= 20xF71
+F72=20x 120+ 1500=3900.
E95 20visitsresult in 20.10- 18.00=2.1extrapigletsper sow.The return from 1 extra piglet
isUS$30. Sothetotalreturnsfrom extrapiglets are2.1x30x(100sows)- 6300(incell
formulation: F77xF78x(E51-E47).
DUO Themarginal costs are:ATVC/AY(whereY=pigletsperfarm). Inthiscase:
(C110 -C109)/ (B110-B109)=600/ 30=20.
D i l l Marginal costs =(Clll -CI10)/ (Bill -B110) =600/50=12.
F183 Youhavetocheckthegraph orthetable tofind thepoint where themarginal returns are
equaltothemarginalcosts.Thisiswith 300extrapiglets.Checkthetable:300extrapiglets
correspond with35visits.
F196 Now the marginal returns are equal to the marginal costs with 280 extra piglets. This
corresponds with 30visits.
F212 'Novisit'shouldbepreferred whenthemarginalreturnsneverexceedtheaveragecosts.So,
thebreak-even point isthepoint where the marginal returns are,at one stage,equal tothe
average costs but neverexceed them.The lowest value ofthe AVCis 11.43.So,when the
MR(=netreturnsfrom 1 extrapiglet)is11.43itwillalwaysbesmallerthan,orequalto,the
averagecosts.
Production function(filename:PRFUNCT2.WK1)
D92 MarginalcostsofIcomparedwith0are21-0=US$21(E76-D76).
F93 Marginalreturnsof IIIcompared withHare 1652- 1617=US$35 (G73-F73).
Gl10 Fortreatment IIthe marginal returns are stillhigher than the marginal costs (US$151and
0respectively),butfortreatmentIIIthemarginalreturnsaresmallerthanthemarginalcosts
(US$35 and 199 respectively). So,treatment III is 'one step too far' and the treatment
previoustothisone(treatmentII)isthebest.
G132 Thereturnsfrom wool arenowfor treatment 0toIIIrespectively (27%of US$774=)209,
220,262and272.Thereturnsfrom ewesandlambsremainthesame.Sothetotalreturnsare
now:US$777, 871, 910and918.
This givesthe following marginal costs andreturns:
297
Chapter 19
0 I II III
Marginal costs 0 21 0 199
Marginalreturns 0 94 39 8
Again,treatment IIIis 'one steptoofar', sotreatment IIis still thebest option.
Partialbudgeting (filename:PARTBUD.WK1)
F44 Thecosts of surgery areextracosts:4.
F46 Lessmilkisreturnsforegone: 3.
F47 Less feed necessary isreduced costs:2.
F48 The heavier weights of calves areadditional returns:1.
F49 Theincrease incullingrateis extracosts orreturnsforegone: 4aswell as3 arecorrect.
E74 Thereturns from acalfare:
malecalf :(43+3.5)kg xUS$6x0.88 survival = US$245.52
female calf:(40+3.5)kg xUS$4 x0.88 survival =US$153.12
82% ismale,sothe average returns are0.82 x245.52+0.18 x 153.12=US$229.
Gl12 Thereduced costs arethecosts nolonger obtained because less feed isnecessary: 70kgof
milk less saves70x0.5 =35kgofconcentrates xUS$0.20 =US$7.00.
F135 20%of US$340=US$68.
D152 No:thenet return from acaesarean section isnegative (US$-208.66).
G164 No:inthis situation thenet return =USS-92.82,sostill negative.
F173 No:theadditional returns are US$30.34,therearenoreduced costs,norevenues foregone,
butyetthecosts of surgery being US$150.Thesecosts arehigherthan thereturns.
Cost-benefitanalysis(filename:COSTBEN.WK1)
F66 Discount factor year 1 = 1/ (1+0.05) =0.95.
F67 Discount factor year 2 = 1 / ( 1+0.05)A2=0.91.
N37 Discount factor year 1 = 1/ (1+0.09)=0.92.
N44 0.92 xUS$725=US$667.
N56 Discount factors arefor years 1 to4: (1/ 1.06 =)0.94, (1/(1.06)A2=)0.89,0.84 and0.79.
Thepresent valueofUS$200everyyearis(0.94+0.89 +0.84+0.79) x200=US$692.
N66 Discountfactor x25=23.11,sothediscount factoris0.9244.Nowwehavetosolve:0.9244
= l/(l+i) A 2.
=>(l+i) A 2= 1/(0.9244)
=>i = 4%.
F97 NPV isthe total benefit minus total cost =G91 -F91=US$25.58 -US$15.99 =US$9.59.
C98 B/C-ratio isthe totalbenefit divided bytotalcost=
D91/C91 =US$52.18/US$37.46= 1.39.
F103 The NPV of strategy Ais higher than the NPV of strategy B(US$14.72 compared with
US$9.59),sostrategyAisthebest.
F108 The B/C-ratio of strategy A is lower than the B/C-ratio of strategy B(1.39 and 1.60), so
strategy Bisthe best.
298
Fl16 False: the NPV shows what your net result is from your total investment. The B/C-ratio
showswhatyourreturnsareforeverydollaryouhaveinvested. So,whenyouwanttogetas
much money back for every dollaryouinvest,theB/C-ratio isthebest criterion.
A122 Thereal interest ratethatmakes thebenefits equaltothecostsiscalled the internal rateof
return!Anestimation of thisvalueisgiven incell C99:23.9%.
F134 B: When the real interest rate increases, the present value of future costs or benefits
decreases. Strategy Aentails many costs inyears 1 and 2and the benefits appear at the
end,soahighrealinterestrateisnegativeforthisstrategy andhasagreateffect ontheNPV
and the B/C-ratio. Strategy Bhas costs and benefits both at the end, so the real interest
rate will nothave agreatinfluence ontheNPV andthe B/C-ratio.
Linearprogramming (filename: UNPROG.WK1)

C47 Onecow (=X)requires 1.25 hoursoflabour.Soa= 1.25.
D48 One sheep (=Y)requires 1/5 haof grass.Sob=0.20 (and thecomplete grassconstraint is:
0.50 xX+0.20 xY<30 ha).
E47 The total amount of labour available is 40 hours. (So the complete labour constraint is:
1.25 xX +0.15 x Y<40hours)
F74 The areabelow both lines are solutions which arefeasible for these constraints (because
bothlinesgivemaximal solutions),soareaB.
F84 No: The maximal number of cows in the feasible area is 32 (labour is the limiting factor
for that),soabarn for only40cows doesnotinfluence the feasible area.
DUO True:Thereturnscan increaseuntilthegraphical representation of thereturnsjust touches
the feasible area at anangular point.
E136+E137
Not all thepoints given inthetable arefeasible points.Thefeasible points are:
(X,Y) = (20,100);(X,Y) = (0,150) and (X,Y) = (32,0).The total returns of these points
are:
for (X,Y)=(20,100):20xUS$600+ 100xUS$100=US$22000
for (X,Y)=(0,150): 0xUS$600+ 150xUS$100=US$15000
for (X,Y)=(32,0):32xUS$600+0xUS$100=US$19200
Thepointwiththehighestnetreturnsistheoptimalpoint,whichis(20,100).Sotheoptimal
number ofcows is 20andtheoptimal number of sheep is100.
F174 The objective function is indifferent for (20,100) and (32,0) when one of the graphical
representations of thisfunction touchesboth points.So,the slope of theobjective function
should be the same as the slope of the labour constraint: 1.25 xX+ 0.15 x Y=40. So:
Y = (-1.25 /0.15) xX+40/0.15.Theslope is-1.25/0.15 =-8.33. Sothe correct answer
isD.
D185 The objective function is: 600 xX+ net returns(sheep) xY= max. So Y= (-600 / net
returns(sheep)) xX+max/net returns(sheep).The slope of theobjective function has to
be -8.33. So-600/netreturns(sheep)=-8.33.Thisresults in:netreturns(sheep) =US$72.
D194 Now the slope of the objective function should be the same as the slope of the grass
constraint: -0.50 /0.20 = -2.5.So -600/ net returns (sheep) = -2.5.This results in: net
299
Chapter 19
returns(sheep) = US$240. (Have a look at the 2previous answers for a more detailed
explanation.)
Dynamicprogramming (filename: DYNPROG.WK1)

A54 All sows arereplaced after parity 4,sothere isthe samenumber of animals ineach parity.
The average gross returns minus feed costs onthefarm is the average of the four parities:
(USS240+320+400+340)/4=US$325.
C68 Theprofit on asow inparity 1 isthe gross returns minus feed costs for parity 1(US$240)
and thechange invalue ofthe sow.Before the sowisinparity 1,her value isthe purchase
value (US$225). Atparity 1,her value isthe slaughter value (US$180). Sothe change in
value isUS$-45.
Theprofit onthesowisUS$240-45=US$195.
E68 Theprofit onthe sowisH47+(H48-G48)=US$400+ (210- 190)=US$420.
F68 Theprofit onthe sowis147+(148-H48)=US$340+(195-210)=US$325.
G94 Theprofit from replacing asow after 3parities isthe slaughtervalueof the sow (cellH48:
US$210)minusthepurchasepriceofayoungsow(cellF57:US$225)plusthegrossreturns
minus feed costsof asowinparity 1 (cellF47:US$240).So:US$225.
D148 C: The profit from replacing a sow in parity 2iscalculated in cell C108.This has to be
summed withtheoptimal decisiontaken at stage20for asowinparity 1:cell CI32.
D153 Theprofit from keeping isE108+C130=US$400+210=US$610.
Theprofit from replacing isC108+C122=US$205+ 180=US$385.
Conclusion: Keeping ismoreprofitable thanreplacing.
1175 True:thevalues of stage20areused instage 19.
C251 The RPOof asow inparity 1 isthe profit from keeping (cell E214: US$6335) minus the
profit from replacing (cellD214:US$6205):US$130.
D251 Theprofit from keeping (cell E213:US$6310) minus the profit from replacing (cellD213:
US$6215):US$95.
E 251 Theprofit from keeping (cellE212:US$6235) minus the profit from replacing (cellD213:
US$6235):US$0.
F272 Change cell F57 (purchase price) toUS$175 and check the figure that shows the optimal
path.Theoptimal path doesnotchange:parity 4is still the optimal moment toreplace the
sow.
F290 Change cell H116 (genetic improvement) to US$8 and check the figure that shows the
optimal path.Nowparity 3istheoptimal moment toreplace thesow.
Markovchainsimulation (filename: MARKOV.WK1)

E30 In the first year there are 72healthy sheep. In the second year 18of these sheep will be
sick,sotheprobability of ahealthy animalbeing sicknext yearis 18 /72=0.25.
E32 Inthefirst yearthere are 18sick sheep.Inthenextyear9of these sheep willbehealthy,so
theprobability of aninfected animalbeinguninfected next yearis9/18 =0.50.
C38 The sumof therow hastoequal one,so 1 -0.25 =0.75.
D39 The sumof therow hastoequal one,so 1 -0.50=0.50.
300
F70+F71
Change cell B47 to75 (A47 automatically changes to 15).Now you can see that in year4
thenumber ofuninfected animals is60again,and thenumber of infected animals is30.
C107 0.75. This value hasnot changed
D107 0.25.This value hasnot changed
C108 0.Once animals areinfected they will neverbecomeuninfected again.
D108 1.All animalsthat areinfected once remain infected.
CI32 Transient: onceasheephaspassed this state itwill never comebacktothis state again.
Thetransition diagrambelonging tothis situation clarifies this:
0.25 0.25
Infected Uninfected "Immune-
1 t 0.5 1
J I I L
CI33 Absorbing: once ananimal hasreached this state,itwillneverleaveit again.

CI34 Absorbing: once ananimalhasreached this state,itwillnever leave itagain.
H137 Eventually 50%ofthe animals willbecome infected and 50%of theanimalswill become
uninfected, so45sheepwillbeuninfected. (Have alook atthetransition diagram above).
E142 No: Compare for instance the situation where all animals are immune with the situation
where all animals are infected.
G177 Number of staphylococcus infections inyear 1 =0.12 xuninfected +0xStrept. ag.+0x
Strept. spp.+0.40 xStaph.+0xother +0xculled =0.12 x240+0.40 x22=37.6.
A211 Strategy 1:Youhavetochangecell C172to0.25 and cellF172to0.25.Have alook atthe
statematrix.Thesteady state isnow:
Uninf. : 185
Strep, ag. : 6
Strep, spp.: 4
Staph.: 30
Other inf.: 4
Culled: 72
A218 Strategy 2:Change cells C172and F172back to0.10 and0.40 respectively. Cell F169has
tobe0.04 instead of0.12. Tomake the sum of the rowequal to 1.00 again,you alsohave
tochange thenumber of animals that remain uninfected: 0.60 instead of 0.52 (Cell CI69).
The steady state isnow:
Uninf.: 203
Strep, ag. : 6
Strep, spp.: 4
Staph.: 14
Other inf.: 4
Culled: 70
301
Chapter 19
C246toG248
Fill inallthe valuesthemodelcalculated. After that thetable will looklike:
Strategy Str. ag. Str. spp Staph. Other. Culled Costs str. Total
No 5 4 36 4 73 0 38 800
Strategy 1 6 4 30 4 72 1900 38 820
Strategy 2 6 4 14 4 70 2500 33 940
H255 2:Thisisthestrategythatresultsinthelowesttotalcosts(asyoucanseeinthetableabove).
D310 Youfirst havetocalculate Ybefore youcancalculate X.Y= 1 -0.995A(15)=0.07.
X= 1 -(0.07+0.02 +0.12+0.02 +0.29) =0.48
D311 Y= 1-0.995A(15)=0.07.
F319 False: Y= 1 -0.995A(no. of ag.in previous year),so the number of animals with ag. is
important, not the percentage! (A farm with 50 animals where 40% of the animals are
suffering from Strep,ag.willhavethesamevaluefor Yasafarm with 200animals where
10% of the animals are suffering from Strep, ag. In both situations Y= 1-0.995A(20)=
0.095.)
H346 Higher:whenmoreanimalsareinfected, theriskofeffective contactwithasickanimalwill
be higher.
(When 65animals areinfected: Y= 1 -0.995A(65)=0.28.)
A352 Change cellE302 to 190and cell E303to 65and have alook atthe state matrix. Y starts
high (0.28)but decreases overtime.After 6yearsYis equal totheYwecalculated in the
default situation.
MonteCarlosimulation (filename:MONTCAR.WK1)
A119 Most probably the standard deviations will be higher when only 40 replicates are made
compared with 250replicates.
D165 B:Theinitialsituationisthestablesituation,andonecharacteristicofaMarkovchainisthat
when thestable situation isreached,the situation doesnotchange anymore.
D194 The costs inperiod 6are(number of animals suffering from Aujeszky's disease) x US$20
+ (number of animals suffering from Aujeszky's disease and a secondary infection) x
USS150=(cellH148)x20+(cellH149)x 150.Duetotherandomelementsofthemodel,
this valuewill differ betweenusers.
A224 When thenumber of animals ismuchhigher, the standard deviation willbe smaller, sothe
line willbe smoother.
Decisionanalysis (filename: DECANAL.WK1)

A51 The payoff of the different strategies isbased onthe following assumptions: the value of
an average cow (with nodisplaced abomasum) =COC+SV.
When acowhasgotdisplaced abomasum,andyouchoose 'nosurgery' thevalueofthecow
decreases toonly the slaughter value(SV).
After successful 'surgery' the valueofthecow isagain COC+SV,butyou have incurred
theexpense of the surgery, sothepayoff isCOC+SV-SCa(i).
302
When 'surgery' fails, the value of the cow decreases to SV (when the meat is not
condemned) or even to 0 (when the meat is condemned). There is also the cost of the
surgery, sothe payoff of an unsuccessful surgery is 'proportion not condemned' xSV-
SCa(i).
D76 TheEMV ofal isUS$889,of a2US$892andtheEMV of a3isUS$800.Strategy a2 has
thehighestEMV andistheoptimal strategy according tothis strategy.
G97 The maximin criterionjudges astrategy onitsworst payoff:
Strategy al: US$505
Strategy a2:US$60
Strategy a3:US$800.
a3 has the highest 'worst payoff' and isthe optimal strategy according to the maximin
criterion.
F105 Minimax regret:
Strategy al: US$295
Strategy a2:US$740
Strategy a3:US$300.
a l has the lowest 'maximal regret' and isthe optimal strategy according tothe minimax
regret criterion.
Fl14 Themaximaxcriterionjudges astrategy onitsbest payoff:
Strategy al: US$985
Strategy a2:US$1100
Strategy a3:US$800.
a2 has the highest 'best payoff' and is the optimal strategy according to the maximax
criterion.
C139 B:thedecisionmakerisriskaverse.
C153 U(x)= 100-(100A2)/4000= 97.5
D153 U(x) =500-(500A2)/4000=437.5
E153 U(x)=900-(900A2)/4000=697.5
A158 Option (a) gives autility of 437.5.Option (b) gives autility of 0.5 x97.5 +0.5 x697.5=
397.5.Optiona hasthehighestutility,soa willbe preferred.
D163 The farmer is risk averse,because (s)he prefers US$500 for sure to the uncertainty of
50/50%probability of US$100/US$900.
D171 B:EMVisarisk-neutral criterion.
D178 D:alltheanswers arecorrect.
D194 al: thisstrategy hasthehighestutility.
G257 The probability of success when theveterinarian gives the forecast that the surgery will
fail =P(Successlz2).Thisvalueisgiven inthetable (in cell G253):0.57.
D268 Themonetary valueofa1,given forecast z(1),isthePosterior Probability for this situation
multipliedby theprofit from the strategy,summed for success andfailure. Thisis:
C216xF253+C217xF254=US$970x0.89+US$490x0.11=US$917.20.
F297 Yes:theEMVwithforecast ishigherthanwithoutone:US$917.80 (cellE293)andUS$892
(cell D87) respectively, sotheforecast isworthitsmoney.
303
Chapter 19
F304 YouhavetochangecellC209(=priceofaforecast) toUS$50.NowtheEMVwith forecast

isUS$882.80.TheEMVwithout aforecast isstillUS$892,sotheforecast istooexpensive
tobe worth it.Thecorrect answer isno.
Decision-tree analysis (filename:DECTREE)

1. The program shows EU(keep) etc.In our case we donot work with utility, so the given
values are EMVs.The EMV of 'keep' is US$996.5, the EMV of 'replace' is US$740.
'Keep' hasthehighest EMV,sothefarmer should decidetokeepthecow.
2. Onthefollowing pageaprintout isgiven oftheentiretree.
3. EMV ofstrategy a1 =US$913
EMV of strategy a2=US$840
EMVof strategy a3=US$800
EMV of strategy a4=US$816.95
The optimal decisionis strategy al.
4. The variable coc: this value gives the profit from keeping a cow compared with
replacement. When acow producesbelow average,shewill yield alowprofit onkeeping,
soalowcoc.
5. The threshold of coc is USS267.06. This means that when coc is US$267.06 the profit
from culling thecow isequal totheprofit from strategy al. Acoclowerthan the threshold
meansthat culling ismoreprofitable than strategy al.
6. The graph you seegives the relation between thecosts of strategy al and thethreshold of
coc (where culling isequal to strategy al). When the costs of strategy al are quite high,
thecow has toproduce very well tomakeitworthwhile tochoose for surgery. So,higher
values ofcostl give higher thresholds ofcoc.
8. When the probability of success of rolling is 0.68 or more, rolling is the most optimal
strategy.
The graph shows the EMVs of all four strategies (the first character of the name of the
strategy isgiven),dependent on the value of theprobability of success of rolling (prob4).
TheEMVsofstrategiesal toa3donotdiffer whenprob4increasesbuttheEMVofstrategy
a4increaseswhen theprobability of successincreases.
304
Computer excercisesonanimalhealtheconomics
success1 icoc+sv-costl
~Ö85
faille
-O0.015 -costl
faillnc i sv-costl
#
0 = Chancenode
success2 icoc+sv-cost2 | =Decisionnode
0.75 • =Terminalnode
fail2c - • -cost2
O 0.2
fail2nc i sv-cost2
#
Choose-flj sued.2 icoc+sv-cost4-costl
0.85
isv
recur -1.2 fail1.2c
Q 0.015 i-cost4-costl
"05 "
keep faill.2n
-0 #
isv-cost4-costl
success4 norecur icoc+sv-cost4

#
0.3
replace
-Q Isv-cost4
fail4nc
isv-cost4
305
306
Index
a.Index Rule Hurwicz - 139 Average Profitability of Herd Life in Sows Table 4.10 -
Absorbing State Markov Chain - 104 53
Accounting Systems Farm The Need for - 25 Average Total Cost - 20
Analysis Cost-Benefit - 30 Average Variable Cost - 20
Analysis Cost-Effectiveness - 31
Analysis Decision - 32 Bacteriologically Negative Mastitis Losses from - 48
Analysis Decision Tree - 34 Bans Export Determining the Indirect Effects - 162
Analysis Economic Basic Methods of - 25 Bayes' Theorem - 142
Analysis Neutral Net - 197 Bayes' Theorem Calculation of the Posterior Probabilities
Analysis of Data Relevant to Model - 61 Table 10.6 - 144
Analysis of Risk - 172 Bellmen's Principle of Optimality - 89
Analysis Parametric - 155 Benefit-Cost Ratio - 31
Analysis Sensitivity - 23, 61,63, 74 & 243 Budgeting in Partial - 28
Analysis Systems - 60 Budgeting Whole-Farm - 69
Animal Disease Direct Effects of - 14 Budgets Enterprise in Gross Margin Form - 27
Animal Disease Indirect Effects of - 14 Byproduct Reduction by Disease - 6
Animal Disease Losses Due to Table 2.1 - 16
Animal Health Economics Computer Exercises on - 245 Caesarean Section Case Partial Budgeting: Computer
Animal Health Management Economic Decision Making Exercise - 258
in- 13 Calculated Annual Losses Due to Mastitis Table 4.6 - 48
Animal Health Management Further Applications of Calving Interval Effect - 42
Economic Decision Making in - 22 Calving Interval Effect on Milk Receipts Table 4.2 - 44
Animal Health Programs Economic Analysis of Producer- Calving Interval Optimal Length of in Calculated Losses
Finance - 229 Per Cow Per Year Table 4.3 - 45
Animal Health Programs Economic Analysis of Research Calving Intervals & Production Data of Cows with
Priorities - 230 Clinical Digital Diseases Table 4.7 - 49
Animal Health Programs Economic Cost of Cost Calving Pattern Herd Results of the Optimum for
Recovery in - 226 Different Sets of Constraints Table 6.2 - 80
Animal Health Programs Efficiency of Resource Capacity for Work Reduction of By Disease - 6
Allocation - 224 Cattle Growing Production Cost Derived from the
Animal Health Programs Equity of - 223 Production Function on the Hypothetical Response to
Animal Health Programs Financial Efficiency of - 226 Anthelmintic Dosing of Table 2.3 - 22
Animal Health Programs National Extension of EpiMAN CE Certainty Equivalent - 138
for - 194 Certainty Equivalent CE - 138
Animal Health Programs Resolving the Cost Recovery Chance Nodes - 35
Issue - 227 CHESS Computerised Herd Evaluation System for Sows -
Animal Health Programs Sustainability of - 221 196
Animal Simulation Individual - 121 Classes Disjoint States Markov Chain - 104
Animal Welfare - 9 Classical Production Function Figure 2.3 - 18
Animals & their Products Risk Analysis & International Coliform Mastitis Losses from - 48
Trade in - 171 Common Combinations of Modelling Type & Technique
Annuity Values Simulated Five-Year Gross Margin for Table 5.1 - 66
Dairy Enterprise Intervention Table 11.2 - 152 Common Diseases Economic Effects - 15
Anthelmintic Dosing in Growing Cattle Hypothetical Community Development Effects of Animal Disease on -
Response to Table 2.2 - 19 9
Anthelmintic Dosing in Growing Cattle Production Cost Computer Exercise Cost-Benefit Analysis: Enzootic
Derived from the Production Function on the Bovine Leucosis Case - 262
Hypothetical Response to Table 2.3 - 22 Computer Exercise Decision Analysis Displaced
Anthrax Risk of Introducing by Importing Green Hides - Abomasum Case - 288
175 Computer Exercise Decision-tree Analysis: The Program
Approach Normative - 59 SMLTREE - 294
Approach Positive - 59 Computer Exercise Farm Advisory Case - 250
Aujeszky's Disease Monte Carlo Simulation: Computer Computer Exercise Helminthic Case - 255
Exercise - 283 Computer Exercise Linear Programming: Cows and/or
Average & Marginal Cost Functions Figure 2 . 5 - 2 1 Sheep Case - 266
Average Annual Losses Owing to Clinical Digital Computer Exercise Monte Carlo Simulation: Aujeszky's
Diseases Table 4.8 - 50 Disease - 283
Average Fixed Cost - 20 Computer Exercise Partial Budgeting: Caesarean Section
Average Physical Product - 17 Case - 258
Computer Exercise Sensitivity Analysis - 253
Computer Exercises on Animal Health Economics - 245 Decision Analysis Displaced Abomasum Case Computer
Computer Modelling & Information Systems - 115 Exercise - 288
Computer Modelling Advantages of - 116 Decision Criteria Various Outcome According to Table
Computer Programs Risk Analysis - 177 10.2- 141
Computer Simulation - 59 Decision Making Multiperson - 146
Consumer Surplus - 161 Decision Making Risky Scope & Concepts of - 135
Contagious Disease Control Payoff Matrix Example Table Decision Nodes - 34
3.4 - 34 Decision Problem Risky Components of - 136
Contagious Diseases Economic Effects - 15 Decision Risky Components of - 136
Control Programs Disease in Developing Countries - 209 Decision Support - 187
Comer Point Linear Programming - 73 Decision Support Dairy Herd - 197
Corynebacterium pyogenes Mastitis Losses from - 48 Decision Support Pig Herds - 195
Cost Average Fixed - 20 Decision Support Systems - 188
Cost Average Total - 20 Decision Support Systems for Farm Use - 195
Cost Average Variable - 20 Decision Support Use of Model in - 63
Cost Estimated Annual of Simulated Veterinary Decision Tree Hypothetical Representing Action Choices
Interventions Table 11.1 - 151 Figure 3.4 - 36
Cost Fixed - 27 Decision Tree Left-Displaced Abomasum Figure 3.5 - 37
Cost Functions & Economic Choice - 19 Decision-tree Analysis: The Program SMLTREE - 294
Cost Functions Average & Marginal Figure 2.5 - 21 Decision-Tree Analysis - 34
Cost Functions Total Figure 2.4 - 20 Demand & Supply Curves Figure 12.1 - 160
Cost Marginal - 20 Demand & Supply in a Market Economy - 160
Cost of Productivity - 17 Deterministic Model - 61, 63 & 64
Cost Recovery Issue Resolving in Animal Health Developing Countries Disease Control Problem
Programs - 227 Identification - 210
Cost-Benefit Analysis - 30 Developing Countries Disease Control Programs in - 209
Cost-Benefit Analysis Application of Table 3.2-31 Developing Countries Effective Disease Control
Cost-Benefit Analysis: Enzootic Bovine Leucosis Case Technologies - 211
Computer Exercise - 262 Developing Countries Methods to Deliver Technologies &
Cost-Effectiveness Analysis - 31 Knowledge - 213
Costs & Revenues Future Discounting of - 87 Developing Countries Successful Adoption & Use of
Costs Variable & Fixed Examples of Table 3.1 - 27 Disease Control Measures by Farmers - 215
Costs Variable - 27 Deviation Standard - 65
Cows and/or Sheep Case Linear Programming: Computer Differences in Performance among Dutch Pig Fattening
Exercise - 266 Herds Table 4.11 - 54
Cows Empty Critical Production Levels Below Which it Differences in Performance Among Dutch Sow Herds
is not Profitable to Inseminate Table 7.4 - 94 Table 4.9- 51
Cows Individual RPO-Values for - 97 Digestibility of Feed Effects of Disease On - 3
Culling Reasons For - 7 Digital Diseases Average Annual Losses from Table 4.8 -
Cultural Significance of Animals - 9 50
Digital Diseases Clinical Economic Impact of - 49
Dairy Cattle Herd Health & Management Control - 202 Digital Diseases Economic Impact of - 49
Dairy Cows Replacement Decisions Application of Digital Diseases Production Data & Calving Intervals of
Dynamic Programming to - 92 Cows with Table 4.7 - 49
Dairy Farms Dutch Typical Results for Appendix 4.1 - 56 Diminishing Productivity - 17
Dairy Herd Decision Support - 197 Discount Rate - 30
Dairy Herds Linear Programming Model for - 76 Discounting Future Costs & Revenues - 87
Dairy Herds Reproductive Failure in - 42 Disease Animal Direct Effects of - 14
Dairy ORACLE A Dairy Herd Simulation Model - 123 Disease Animal Indirect Effects of - 14
Dairy ORACLE Financial Statement Report Table 9.2 - Disease Control Developing Countries Successful
129 Adoption & Use by Farmers - 215
Dairy ORACLE Model Output - 127 Disease Control Example Payoff Matrix for Table 3.4 -
Dairy ORACLE Prediction of Events Examples of 34
Functions Used in - 123 Disease Control Highly Contagious Modelling the
Dairy ORACLE Reproductive Performance Indices Report Economics of Risky Decision Making in - 159
Table 9.1-127 Disease Control in Developing Countries Effective
DairyMAN - 197 Technologies - 211
Data Relevant to Model Analysis of - 61 Disease Control in Developing Countries Methods to
Database Spatial in EpiMAN - 191 Deliver Technologies & Knowledge - 213
Database Technical Information FMD Model - 193 Disease Control Programs Economic Analysis of
Days Open Effect - 42 Government Finance - 228
Death Premature & Livestock Productivity - 5 Disease Control Programs Effectiveness of - 226
Decision Analysis - 32 Disease Control Programs in Developing Countries - 209
Disease Control Programs in Developing Countries Economic Losses Resulting from a Primary Outbreak
Problem Identification - 209 FMD (Table 12.1) - 167
Disease Spread of - 103 Economic System Wider in Livestock Production Figure
Disease Treatment v Health Management - 10 2.2 - 14
Displaced Abomasum Case Decision Analysis Computer Economic Techniques in Economic Studies - 10
Exercise - 288 Economics Animal Health Computer Exercises on - 245
Dogs Risk of Introducing Rabies through Importation of - Economics Experimental - 207
179 Economics Integration of Into the Policy Development &
DP Advantages of - 96 Implementation of Disease Control Animal Health
DP Dynamic Programming Services Cost Recovery for - 220
DP Stochastic - 91 Economics Module for EpiMAN - 194
DP-Algorithm - 96 Economics of Risky Decision Making in Highly
DP-Solution Procedure for Least-Cost Network Problem Contagious Disease Control Modelling - 159
Table 7 . 2 - 9 1 Economy Market Demand & Supply in - 160
DSS Decision Support Systems Efficiency Criteria Stochastic - 139
Dynamic Models - 61 ELCE-Method of' Risk Assessment - 138
Dynamic Programming & Markov Chains - 99 Embryo Transfer Program Risk of Disease Being
Dynamic Programming - 89 Introduced by Table 13.3-179
Dynamic Programming Application of to Replacement Embryo Transfer Program Risk of Disease Being
Decision in Sows - 95 Introduced by Table 13.3 - 179
Dynamic Programming Application of to Replacement Embryo Transfers OIE List A Diseases - 178
Decisions in Dairy Cows - 92 Empirical Model - 59
Dynamic Programming: Sow Replacement Case Computer EMV Definition of - 136
Exercise - 270 EMV Expected Monetary Value
Dynamic Programming to Optimize Treatment & EMV Expected Monetary Value - 138
Replacement Decisions - 85 EMV of a Perfect Predictor - 145
EMV of Perfect Information - 145
Economic Analysis Basic Methods of - 25 EMVs Based on Posterior Probability Table 10.7 - 144
Economic Analysis of Government Financed Disease Energy Intake Effects of Disease On - 1
Control Programs - 228 Energy Metabolism Effects of Disease On - 5
Economic Analysis of Producer-Financed Animal Health Enterprise Budgets in Gross Margin Form - 27
Programs - 229 Enzootic Bovine Leucosis Case Cost-Benefit Analysis:
Economic Analysis of Research Priorities in Animal Computer Exercise - 262
Health Programs - 230 Epidemiologist's Workbench FMD Model - 193
Economic Analysis Simple Formulating Spreadsheet EpiMAN Description of - 189
Model - 236 EpiMAN Economics Module for - 194
Economic Analysis The Basic Model Figure 2 . 1 - 1 4 EpiMAN Extension to Other National Animal Health
Economic Benefit of Animal Disease Control Methods of Programs - 194
Measuring - 9 EpiMAN Spatial Database in - 191
Economic Choice & Cost Functions - 19 EpiMAN The Structure of Figure 14.1 - 190
Economic Cost of Cost Recovery in Animal Health Equimarginal Principle - 23 & 25
Programs - 226 Equity in Animal Health Programs - 223
Economic Decision Making in Animal Health Equivalent Certainty CE - 138
Management - 13 EROI Expected Return On Investment
Economic Decision Making in Animal Health Expected Monetary Value - 139
Management Further Applications of - 22 Expected Monetary Value - 32
Economic Impact of Clinical Digital Diseases - 49 Expected Monetary Value EMV - 138
Economic Impact of Common Health & Fertility Expected Monetary Values of Different Action Choices
Problems - 41 Table 3.6 - 38
Economic Impact of Daily Weight Gain Pigs - 54 Expected Return On Investment - 151
Economic Impact of Digital Diseases - 49 Expected Value Markov Chain Providing - 110
Economic Impact of Feed Conversion Efficiency in Pigs - Experimental Economics - 207
54 Expert Systems FMD Model - 192
Economic Impact of Litters per Sow Per Year - 51 Export Bans Determining the Indirect Effects - 162
Economic Impact of Mastitis - 47 Export Model Assumptions Underlying - 165
Economic Impact of Mortality Rate in Pigs - 55 Export Model Basic Principles of Figure 12.5 - 166
Economic Impact of Mortality Rate in Pigs - 55 Exporting a Product Market Situation for a Country
Economic Impact of Pig Fattening Performance - 53 Figure 12.3 - 163
Economic Impact of Premature Disposal of Sows - 53 External Validation of the Model - 62
Economic Impact of Reproductive Failure - 42
Economic Impact of Sow Performance - 50 Factor Product Relationship - 17
Economic Importance of Animal Disease - 1 Farm Accounting Systems The Need for - 25
Economic Input Factor Veterinary Services as - 15 Farm Advisory Case Computer Exercise - 250
Farm Decision Making Integrated Information Systems Generic Livestock Generator - 119
for- 187 Genetic Selection Accuracy Effects of Disease on - 7
Farm ORACLE - 197 GIS Geographic Information System - 189
Farm Use Decision Support Systems for - 195 GIS in EpiMAN - 189
Farm Virus Production Model FMD - 191 Green Hides Risk of Introducing Anthrax by Importing of
Farmer's Attitude towards Risk - 153 - 175
Farming Portraits of Styles - 208 Gross Margin Form Enterprise Budgets in - 27
Farms At-Risk Rating FMD Model - 193 Gross Margin Form Profit Budget in Figure 3.2 - 28
Fattening Farms Dutch Pig Typical Results for Appendix
4.3 - 58 Health & Fertility Problems Economic Impact of - 41
Fattening Herds Dutch Pig Differences in Performance Health Herd Programs Payoff Matrix for Two Table 10.1
among Table 4.11 - 54 - 137
Fattening Performance Pig Economic Impact of - 53 Health Management Approach to Optimising Production -
Feasible Set - 70 7
Feasible Solution in Linear Programming - 72 Health Management v Disease Treatment - 10
Feed Conversion Efficiency Altered by Disease - 3 Heifer Rearing & Mastitis Control Expected Return &
Feed Conversion Efficiency in Pigs Economic Impact of - Risk Figure 11.2- 157
54 Helminthic Case Computer Exercise - 255
Feed Conversion Efficiency Reduction by Disease - 7 Herd Calving Pattern for Different Sets of Constraints
Feed Digestibility Effects of Disease On - 3 Results of the Optimum Table 6.2 - 80
Feed Intake Alterations by Disease - 3 Herd Decision Support Pigs - 195
Feed Requirements Alterations by Disease - 3 Herd Dynamics Model - 83
Fertility & Health Problems Economic Impact of - 41 Herd Dynamics Simulation of - 107
Fertility & Premature Disposal - 46 Herd Health & Management Control in Dairy Cattle - 202
Fertility Loss Month of Calving Effect on - 45 Herd Health Control & Management System Information
Fertility Investigation Expert PigFIX - 196 Systems Profitability of - 201
Financial Efficiency of Animal Health Programs - 226 Herd Health Program Total Return & Risk Attributes -
Financial Losses Factors Involved - 42 152
Financial Losses In Case of Disposal Table 3.5 - 37 Herd Health Programs Efficient Percentage Composition
Financial Statement Report Dairy ORACLE Table 9.2 - from Results of Parametric Analysis (Table 11.4) - 156
129 Herd Health Programs Payoff Matrix for Two Table 10.1
Finiteness in Linear Programming - 75 - 137
Fish Diseases Risk of Introducing in Salmon Flesh - 182 Herd Improvement Capacity Effects of Disease on - 8
Fixed Cost - 27 Herd Productivity Effects of Disease on - 7
Fixed Cost Examples of Table 3.1 - 27 Herd Whole Simulation - 121
Flow Chart - 34 Herds Steady-State Major Technical & Economical
Flow Chart Example of Figure 3.3 - 35 Results of Table 8.4 - 109
FMD Foot and Mouth Disease Hierarchic Markov Process - 96
FMD Economic Losses Resulting from a Primary HMP Hierarchic Markov Process
Outbreak Table 12.1-167 Hurwicz a Index Rule - 139
FMD Inter-farm Spread Model - 192 Hypothetical Decision Tree Representing Action Choices
FMD Model Epidemiologist's Workbench - 193 Figure 3.4 - 36
FMD Model Expert Systems - 192
FMD Model Farm Virus Production - 191 Increasing Productivity - 17
FMD Model Meterological Spread - 191 Individual Animal Simulation - 121
FMD Model Rating of At-Risk Farms & Patrol Information Systems & Computer Modelling - 115
Requirements - 193 Information Systems Integrated for Decision Making at
FMD Model Technical Information Database - 193 Farm & National Level - 187
FMD Models - 191 Information Systems Management Pigs - 204
FMD Risky Decision Making in Control Strategies - 167 Information Value of - 144
FMD Simulated Losses from a Theoretical Outbreak in a Information Value of Table 10.8 - 145
Non-Vaccinated Population in the Netherlands (Table Input Output Relationship - 17
12.2) - 168 Input Variables Economic & their Basic Values Table
FMD Stochastic Dominance Rules to Rank Control A8.3 - 113
Strategies in Non-Vaccinated Population Table 12.3 - Institutional Arrangments for Livestock Policy Analysis -
169 231
FMD-Modelling Approach An Overview Figure 12.4 - Integer Programming - 76
164 Integrated Decision Support System - 63
Food-And-Mouth Disease Outbreak Model - 163 Integrated Information Systems for Decision Making at
FSD First-Degree Stochastic Dominance - 140 Farm & National Level - 187
Function Objective - 89 Integration Seamless - 195
Inter-farm Spread Model FMD - 192
Generator Generic Livestock - 119 Internal Rate of Return - 31
Internal Validation of the Model - 62 Figure 12.3 - 163
Market Value Lowered Disease Effect - 5
Lameness, Reproductive Failure & Mastitis Table Losses Markov Chain Model Description of - 107
from - 50 Markov Chain Model Results - 109
Laplace Principle of Insufficient Reason - 139 Markov Chain Period of State - 104
Least-Cost Network Problem Figure 7.2 - 90 Markov Chain Providing Expected Value - 110
Left-Displaced Abomasum Decision Tree Figure 3.5 - 37 Markov Chain Recurrent State - 104
Lily Pond Figure 8.1 - 100 Markov Chain Simplify Representation - 108
Lily Pond with Memory Figure 8.2 - 100 Markov Chain Simulation - 99
Linear Program in General Formulation - 72 Markov Chain Simulation: Pneumonia in Sheep - 276
Linear Program in Models in General - 72 Markov Chain States & Disjoint Classes - 104
Linear Programming - 69 Markov Chain Steady-State Probabilities - 105
Linear Programming Additivity & Linearity in Input & Markov Chain Transient State - 104
Output Coefficients - 75 Markov Chain Transition Diagram - 102
Linear Programming Assumptions - 75 Markov Chains & Dynamic Programming - 99
Linear Programming Assumptions in Perspective - 76 Markov Chains General - 100
Linear Programming Conclusions - 81 Markov Chains Long-Run Properties of - 105
Linear Programming Constraints - 72 Markov Chains States & Transitions - 100
Linear Programming Comer Point - 73 Markov Hierarchic Process - 96
Linear Programming: Cows and/or Sheep Case Computer Markovian Property - 100
Exercise - 266 Mastitis Calculated Annual Losses Due to Table 4.6 - 48
Linear Programming Divisibility in Resources & Products Mastitis Coliform Losses from - 48
-75 Mastitis Control & Heifer Rearing Expected Return &
Linear Programming Feasible Solution - 72 Risk Figure 11.2 - 157
Linear Programming Finiteness - 75 Mastitis Corynebacteriumpyogenes Losses from - 48
Linear Programming Model for Dairy Herds - 76 Mastitis Economic Impact of - 47
Linear Programming Objective Function - 72 Mastitis Infections with Clinical Signs Major Input Data
Linear Programming Optimal Solution - 72 for Table 4.5 - 47
Linear Programming Shadow Prices - 73 Mastitis Losses from Bacteriologically Negative Sample -
Linear Programming Simplex Method - 73 48
Linear Programming Single-Valued Expectations - 75 Mastitis, Reproductive Failure & Lameness Table Losses
Linear Programming Software Packages - 74 from - 50
Linear Programming Solving Procedure - 73 Mastitis Staphylococcal Losses from - 48
Linear Programming to Meet Management Targets & Mastitis Streptococcal Losses from - 48
Restrictions - 69 Mathematical Model - 59
Livestock Production The Wider Economic System Figure Matrix Payoff - 33
2.2 - 14 Maximax - 139
Livestock Productivity Effects of Disease & Disease Maximin - 138
Control Measures On - 1 Mechanistic Model - 59
Livestock Productivity Measurable Effects of Disease On Meterological Spread Model FMD - 191
-5 Milk Receipts Per Cow Per Year Losses in Table 4.2 - 44
Long-Run Properties of Markov Chains - 105 Milk Yield for Third Lactation Cows Table 4 . 1 - 4 3
Losses Financial In Case of Disposal Table 3.5 - 37 Mineral Status Effects of Parasitism On - 5
Losses in Net Milk Receipts Per Cow Per Year Table 4.2 Minimax - 138
-44 MIS Management Information System
Losses Table from Reproductive Failure, Mastitis & MIS Effect in Relation With Sociological Classification
Lameness - 50 Methods Table 15.3 - 206
MIS Future Outlook - 206
Major Input Data for Mastitis Infections with Clinical MIS Management Information Systems Pigs - 205
Signs Table 4.5 - 47 Model Analysis of Data Relevant to - 61
Management & Information Systems for Herd Health Model Calculation for Identical Replacement of a
Control Profitability of - 201 Fictitious Animal Table 7.1 - 88
Management Control & Herd Health in Dairy Cattle - 202 Model Construction of - 61
Management Cycle Figure 3.1 - 26 Model Deterministic - 61 & 64
Management Information Systems Pigs - 204 Model Empirical - 59
Management Targets & Restrictions Linear Programming Model Export Assumptions Underlying - 165
to Meet - 69 Model Export Basic Principles of Figure 12.5 - 166
Marginal & Average Cost Functions Figure 2 . 5 - 2 1 Model External Validation of - 62
Marginal Cost - 20 Model FMD Epidemiologist's Workbench - 193
Marginal Physical Product - 17 Model FMD Expert Systems - 192
Market Economy Demand & Supply in - 160 Model FMD Rating of At-Risk Farms & Patrol
Requirements - 193
Market Situation for a Country Exporting a Product Model FMD Technical Information Database - 193
Model Food-and-Mouth Disease (FMD) Outbreak - 163 Multiple Simulation Runs Pig ORACLE - 132
Model Herd Dynamics - 83
Model Inter-farm Spread of FMD - 192 National Animal Health Programs Extension of EpiMAN
Model Internal Validation of - 62 for - 194
Model Mathematical Model - 59 National Level Decision Making Integrated Information
Model Mechanistic - 59 Systems for - 187
Model Meterological Spread FMD - 191 Net Present Value - 30
Model of Livestock Reproduction & Production ORACLE Net Return Per Unit of Time - 42
- 118 Neutral Net Analysis - 197
Model on Farm Virus Production FMD - 191 Nitrogen Retention - 4
Model Optimization - 61 Nodes Decision - 34
Model Output Dairy ORACLE - 127 Normative Approach - 59
Model Output Pig ORACLE - 131 Nutrient Metabolisms Effect of Disease On - 1
Model Performance - 83 Nutrition Human Effects of Animal Disease on - 8
Model Prototype Approach for Development of - 62
Model Simulation - 61 Objective Function - 89
Model Simulation Dairy Herd Dairy ORACLE - 123 Objective Function in Linear Programming - 72
Model Speadsheet Choice of Program - 236 OIE Office International Epizootic
Model Spreadsheet Advance Calculation Procedures - 234 OIE List A Diseases & Embryo Transfers - 178
Model Spreadsheet Building of - 233 Operational Planning - 26
Model Spreadsheet Formulating a Simple Economic Opportunity Cost - 15
Analysis - 236 Optimal Length of Calving Interval & Calculated Losses
Model Spreadsheet Linking to Other Functions - 234 Per Cow Per Year Table 4.3 - 45
Model Spreadsheet Partial Budgeting as an Example - 236 Optimal Solution in Linear Programming - 72
Model Static - 61 Optimality Bellmen's Principle of - 89
Model Stochastic - 61 Optimization Model - 61
Model Stochastic - 64 Optimization Principle of - 71
Model Use in Decision Support - 63 ORACLE A Generic Model of Livestock Reproduction &
Model Utility Subjective Expected - 137 Production - 118
Model Validation of - 62 ORACLE Dairy A Dairy Herd Simulation Model - 123
Modelling Approach FMD An Overview Figure 12.4 - ORACLE Dairy Financial Statement Report Table 9.2 -
164 129
Modelling Computer Advantages of - 116 ORACLE Dairy Model Output - 127
Modelling Computer Information Systems - 115 ORACLE Dairy Prediction of Events Examples of
Modelling Deterministic - 63 Functions Used in - 123
Modelling Monte Carlo Basic Principles - 117 ORACLE Dairy Reproductive Performance Indices Report
Modelling Monte Carlo Multiple Runs in - 118 Table 9.1 - 127
Modelling Monte Carlo Random Numbers in - 117 ORACLE pig Model Output - 131
Modelling Monte Carlo Simulation Spread in ORACLE Pig A Pig Herd Simulation Model - 129
Management Outcomes - 115 ORACLE Pig Examples of Functions Used in Prediction
Modelling Objectives for - 61 of Events - 129
Modelling Stochastic - 63 ORACLE Pig Simulated Data from Table 9.3 - 131
Modelling the Economics Risky Decision Making in ORACLE Pig Multiple Simulation Runs - 132
Highly Contagious Disease Control - 159 Outcome According to Various Decision Criteria Table
Modelling Type & Technique Common Combinations - 10.2- 141
65
Modelling Type & Technique Common Combinations of Parametric Analysis - 155
Table 5.1 - 66 Parametric Programming - 74
Models Dynamic - 61 Parasites Effects of Mineral & Vitamin Status - 5
Models Pig Herd Simulation Pig ORACLE - 129 Partial Budgeting - 28
Monetary Value Expected (EMV) - 32, 138 Partial Budgeting as an Example of Spreadsheet
Monetary Incentives - 207 Modelling - 236
Monte Carlo Modelling Basic Principles - 117 Partial Budgeting: Caesarean Section Case Computer
Monte Carlo Modelling Multiple Runs in - 118 Exercise - 258
Monte Carlo Modelling Random Numbers in - 117 Patrol Requirements FMD Model - 193
Monte Carlo Simulation: Aujeszk/s Disease Computer Pay-Off Retention - 88
Exercise - 283 Payoff Matrix - 33
Monte Carlo Simulation Modelling Spread in Payoff Matrix for Two Herd Health Programs Table 10.1
Management Outcomes - 115 - 137
Month of Calving Effect on Fertility Losses - 45 Payoff Matrix Table 3.3 - 34
Mortality Rate in Pigs Economic Impact of - 54 Performance Model - 83
Multiperson Decision Making - 146 Physiological Processes Effects of Disease On - 4
Multiple Runs in Monte Carlo Modelling - 118 PigCHAMP - 195
PigCHAMP PigORACLE Interface - 196 Approach - 7
Pig Fattening Farms Dutch Typical Results for Appendix Productive Value of Animals Disease Effect On Figure
4.3 - 58 1.1 - 2
Pig Fattening Herds Dutch Differences in Performance Productivity Animal Alterations by Disease - 2
among Table 4.11-54 Productivity Constant - 17
Pig Fattening Performance Economic Impact of - 53 Productivity Diminishing - 17
PigFIX Fertility Investigation Expert - 196 Productivity Effect of Disease On - 4
Pig Herd Decision Support - 195 Productivity Effect of Respiratory Function On - 5
Pig Herd Simulation Model Pig ORACLE - 129 Productivity Herd Effects of Disease on - 7
Pig ORACLE A Pig Herd Simulation Model - 129 Productivity Increasing - 17
Pig ORACLE Examples of Functions Used in Prediction Productivity Livestock Effects of Disease & Disease
of Events - 129 Control Measures On - 1
Pig ORACLE Model Output - 131 Productivity of Animals Effects of Disease Control on - 8
Pig ORACLE Simulated Data from Table 9.3 - 131 Profit Budget in Gross Margin Form Figure 3.2 - 28
Pig ORACLES Multiple Simulation Runs - 132 Program in Linear General Formulation - 72
PigORACLE PigCHAMP Interface - 196 Programming Dynamic - 89
Pigs Daily Weight Gain Economic Impact of - 54 Programming Dynamic - 96
Pigs Feed Conversion Efficiency Economic Impact of - Programming Dynamic Application of to Replacement
54 Decision in Sows - 95
Pigs Management Information Systems - 204 Programming Dynamic to Optimize Treatment &
Pigs Mortality Rate Economic Impact of - 55 Replacement Decisions - 85
Planning Strategic, Tactical & Operational - 26 Programming Integer - 76
Pneumonia in Sheep Markov Chain Simulation Computer Programming Linear - 69
Exercise - 276 Programming Linear Additivity & Linearity in Input &
Policy Analysis Livestock Institutional Arrangements for - Output Coefficients - 75
231 Programming Linear Assumptions - 75
Portfolio Theory in Choice of Veterinary Management Programming Linear Assumptions in Perspective - 76
Programs - 149 Programming Linear Conclusions - 81
Positive Approach - 59 Programming Linear Divisibility in Resources & Products
Posterior Probabilities Bayes' Theorem Calculation of -75
Table 10.6 - 144 Programming Linear Finiteness - 75
Posterior Probability EMVs Based on Table 10.7 - 144 Programming Linear Model for Dairy Herds - 76
Premature Death & Livestock Productivity - 5 Programming Linear Single-Valued Expectations - 75
Present Value - 30 Programming Parametric - 74
Principle Equimarginal - 23 & 25 Programming Quadratic - 155
Principle Optimization - 71 Programs Computer Risk Analysis - 177
Probability Distributions - 64 Protein Intake Effects of Disease On - 1
Probability that a Test-Negative Animal is Actually Protein Loss Effect of Disease On - 4
Infected, Given a Test Sensitivity of 0.95 & Specificity Protein Metabolism Effects of Disease On - 5
of 1Table 13.1 - 174 Prototype Approach for Development of the Model - 62
Probability that a Test-Negative Infected Animal will be
Included in a Group Destined for Import Table 13.2 - Quadratic Programming - 155
175
Process Diagram - 34 Rabies Cases Per Year Reported & Projected Incidence
Producer Surplus - 161 Probability that Randomly Selected Animal will be
Product Average Physical - 17 infected Table 13.4 - 180
Product Marginal Physical - 17 Rabies Estimated Risks of Introducing from the United
Product Quality Reduction of By Disease - 6 States by a Dog Incubating Table 13.6 - 182
Product Total Physical - 17 Rabies Probability that Safeguards will Fail to Prevent the
Product Yield Reduction by Disease - 6 Introduction of Table 13.5 - 181
Production Cost Derived from the Production Function on Rabies Risk of Introducing through Importation of Dogs -
the Hypothetical Response to Anthelmintic Dosing in 179
Growing Cattle Table 2.3 - 22 Random Numbers in Monte Carlo Modelling - 117
Production Data & Calving Intervals of Cows with Real Cost - 15
Clinical Digital Diseases Table 4.7 - 49 Real Value - 15
Production Function Approach - 86 Replacement Decisions Dynamic Programming for - 85
Production Function The Classical Figure 2.3 - 18 Replacement Decisions in Dairy Cows Application of
Production Levels Critical Below Which it is not Dynamic Programming to - 92
Profitable to Breed Empty Sows Table 7.6 - 96 Replacement of Sows - 101
Production Livestock ORACLE A Generic Model of - Replacement Optimal Time Determination Figure 7.1 - 86
118 Reproduction Livestock ORACLE A Generic Model of -
Productive Life of Animals Reduction by Disease - 7 118
Productive Optimisation for Health Management Reproductive Failure Economic Impact of - 42
Reproductive Failure in Dairy Herds - 42 Selection Genetic Effects of Disease on Accuracy of - 7
Reproductive Failure in Premature Disposal - 46 Sensitivity Analysis - 23, 61,63, 74 & 243
Reproductive Failure, Mastitis & Lameness Table Losses Sensitivity Analysis Computer Exercise - 253
from - 50 SEU Subjective Expected Utility - 137
Reproductive Losses Total Per Farm - 46 Shadow Prices Linear Programming - 73
Reproductive Performance Indices Report Dairy ORACLE Simplex Method Linear Programming - 73
Table 9.1-127 Simulated Losses from a Theoretical Outbreak of Foot-
Resource Allocation Efficiency of in Animal Health and-Mouth Disease in a Non-Vaccinated Population in
Programs - 224 the Netherlands Table 12.2 - 168
Resources Allocation of - 69 Simulation Computer - 59
Respiratory Function Effect on Productivity - 5 Simulation Individual Animal - 121
Retention Pay-Off - 88 Simulation Model - 61
Retention Pay-Off Cows Just Become Pregnant at Three Simulation Model Dairy Herd Dairy ORACLE - 123
Months after Calving Table 7.3 - 93 Simulation Model Pig Herd Pig ORACLE - 129
Retention Payoff for Sows Pregnant at the First Moment Simulation Monte Carlo Modelling Spread in
of Conception after Weaning Table 7.5-95 Management Outcomes - 115
Return & Risk Attributes of a Total Herd Health Program Simulation Multiple Runs Pig ORACLE - 132
- 152 Simulation of Herd Dynamics - 107
Revenues & Costs Future Discounting of - 87 Simulation Systems Critical Steps in - 59
Risk A Definition - 136 Simulation Systems the Basic Steps of Figure 5.1 - 60
Risk Analysis & International Trade in Animals & their Simulation Whole Herd - 121
Products - 171 Simulations Computer - 59
Risk Analysis - 172 Single-Month Equilibrium Herds Results of Table 6.1 - 78
Risk Analysis Computer Programs - 177 SME Single Month Equilibrium
Risk Analysis Standardized Terminology in - 172 SME-Herd - 76
Risk Assessment - 173 SME-Herd Single-Month Equilibrium Herd
Risk Assessment ELCE-Method - 138 SMLTREE Program Decision-tree Analysis Computer
Risk Attributes & Return of a Total Herd Health Program Exercise - 294
- 152 Sociological Classification Methods in Relation With MIS
Risk Communication - 173 Effect Table 15.3 - 206
Risk Considerations Spreadsheet Models With - 239 Software Packages Linear Programming - 74
Risk Farmer's Attitude towards - 153 Solving Procedure Linear Programming - 73
Risk Identification - 172 Sow Cycle of Possible Values of the State Variables Used
Risk Management - 173 to Describe Table 8.3 - 107
Risk of Disease Being Introduced by an Embryo Transfer Sow Farms Dutch Typical Results for Appendix 4.2 - 57
Program with a Policy of a Single Test-Positive Sow Herds Dutch Differences in Performance Among
Disqualifying the Entire Shipment (Table 13.3) - 179 Table 4.9- 51
Risk of Disease Being Introduced by an Embryo Transfer Sow Litters Per Year Economic Impact of - 51
Program with a Policy of a Single Test-Positive Sow performance Economic Impact of - 50
Disqualifying the Entire Shipment (Table 13.3) - 179 Sow Replacement - 101
Risk of Introducing Anthrax by Importing Green Hides - Sow Replacement Case Dynamic Programming: Computer
175 Exercise - 270
Risk of Introducing Fish Diseases in Salmon Flesh - 182 Sows Application of Dynamic Programming to
Risk of Introducing Rabies through Importation of Dogs - Replacement Decision - 95
179 Sows Average Profitability of Herd Life in Table 4.10 -
Risky Decision Components of - 136 53
Risky Decision Making Calculation of the Joint Sows Culled & Retained Data on Number of Table 8.1 -
Probabilities Table 10.5 - 143 101
Risky Decision Making Economics of in Highly Sows Economic Impact of Premature Disposal of - 53
Contagious Disease Control Modelling - 159 Sows Empty Critical Production Levels Below Which it is
Risky Decision Making in Control Strategies FMD - 167 not Profitable to Breed Table 7.6 - 96
Risky Decision Making Veterinarian Likelihood Sows Individual RPO-Values for - 97
Probabilities of Table 10.4 - 143 Sows Pregnant Retention Payoff for at the First Moment
Risky Decision Problem Summary of the Major of Conception after Weaning Table 7.5 - 95
Components of Table 10.3 - 142 Spatial Database in EpiMAN - 191
RPO Retention Pay-Off Speadsheet Model Choice of Program - 236
RPO-Value of an Animal - 97 Spreadsheet Model Advance Calculation Procedures - 234
RPO-Values Individual Cows & Sows - 97 Spreadsheet Model Building of - 233
Spreadsheet Model Formulating a Simple Economic
Salmon Flesh Risk of Introducing Fish Diseases in- 182 Analysis - 236
SDWRF Stochastic Dominance with Respect to a Spreadsheet Model Linking to Other Functions - 234
Function - 141 Spreadsheet Model Partial Budgeting as an Example - 236
Seamless Integration - 195 Spreadsheet Models With Risk Considerations - 239
Spreadsheet Notebooks & Three-dimensional Spreadsheets Transition Probabilities & Technical & Economic Results
- 238 Cycle-Specific Input Values Concerning Table A8.2 -
Spreadsheet Structure of - 233 113
Spreadsheet Using The - 242 Transition Probabilities Concerning Reproduction Basic
Spreadsheets in Practice Examples of the Use of - 243 Values of Biological Input Variables that Determine
Spreadsheets Multi-column - 238 Table A8.1 - 112
Spreadsheets Three-dimensional & Spreadsheet Notebooks Transitions & States Markov Chains - 100
- 238 Treatment Optimization Dynamic Programming for - 85
Spreadsheets User-friendly - 241 Typical Results for Commercial Dutch Dairy Farms
SSD Second-Degree Stochastic Dominance - 140 Appendix 4.1 - 56
Standard Deviation - 65 Typical Results for Commercial Dutch Sow Farms
Staphylococcal Mastitis Losses from - 48 Appendix 4.2 - 57
State Absorbing Markov Chain - 104
State Period of Markov Chain - 104 Uncertainty a Definition - 136
State Recurrent Markov Chain - 104 Utility Function Utility Value - 137
State Transient Markov Chain - 104 Utility Value Utility Function - 137
States & Disjoint Classes Markov Chain - 104 Utility Value Utility Function - 137
States & Transitions Markov Chains - 100
States Concepts & Definitions of - 103 Validation of the Model - 62
Static Models - 61 Value Expected Monetary - 32
Statistical Tests - 65 Value of Information - 144
Steady-State Probabilities Markov Chain - 105 Value of Information Table 10.8 - 145
Stochastic Dominance First-Degree FSD - 140 Value Utility Utility Function - 137
Stochastic Dominance Rules to Rank Control Strategies Variable Cost Examples of Table 3.1 - 27
for FMD in Non-Vaccinated Population Table 12.3 - Variable Costs - 27
169 Veterinarian Risky Decision Making Likelihood
Stochastic Dominance Second-Degree SSD - 140 Probabilities Table 10.4 - 143
Stochastic Dominance with Respect to a Function Veterinary Interventions Expected Return & Risk
SDWRF - 141 Attributes of Table 11.3 - 152
Stochastic DP - 91 Veterinary Interventions Simulated Estimated Annual Cost
Stochastic Efficiency Criteria - 139 of Table 11.1 - 151
Stochastic Model - 61 & 64 Veterinary Management Programs Efficient Dairy
Stochastic Modelling - 63 Expected Return & Risk Figure 11.1 - 156
Strategic Planning - 26 Veterinary Management Programs Portfolio Therory in
Streptococcal Mastitis Losses from - 48 the Choice of - 149
Subjective Expected Utility SEU - 137 Veterinary Services as an Economic Input Factor - 15
Supply & Demand Curves Figure 12.1 - 160 Vitamin Status Effects of Parasitism On - 5
Supply & Demand in a Market Economy - 160
Support System Integrated Decision - 63 Weight Gain Daily Economic Impact in Pigs - 54
Surplus Consumer - 161 Weight Gain Reduction by Disease - 6
Surplus Producer- 161 Whole-Farm Budgeting - 69
Sustainability of Animal Health Programs - 221 Work Capacity Reduction of By Disease - 6
Systems Analysis - 60
Systems Decision Support - 188
Systems Definition of - 61
Systems Expert FMD Model - 192
Systems Integrated Information for Decision Making at
Farm & National Level - 187
Systems Simulation Critical Steps in - 59
Systems Simulation the Basic Steps of Figure 5.1 - 60
TACT Tactics & Control - 196

Tactical Planning - 26
Targets, Management & Restrictions Linear Programming
to Meet - 69
Technical Information Database FMD Model - 193
Terminology Standardized for Risk Analysis - 172
Tests Statistical - 65
The Basic Steps of Systems Simulation Figure 5.1-60
Ticks Organic Effects of - 5
Total Cost Functions Figure 2.4 - 20
Total Physical Product - 17
Transition Diagram Markov Chain - 102

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Animal HealthEconomies

principles and applications

Internationale Agrarisch« Hogssclïool

Framework and basic methods of economic analysis

1 How economically important isanimal disease and why?

2 Economic decision making inanimal health management

3 Basicmethods of economic analysis

4 Economic impact of common health and fertility problems

5 Critical steps in systems simulation

6 Linear programming to meet management targets and restrictions

7 Dynamic programming t o optimize treatment and replacement decisions

8 Markov chain simulation to evaluate user-defined management strategies

9 Monte Carlo simulation to model spread in management outcomes

9.2 Information systems andcomputer modelling 115

Risky choice in animal health management

10 Scope and concepts of risky decision making

11 Application of portfolio theory for the optimal choice of

12 Modelling the economics of risky decision making in

Decision support in animal health management

14 Examples of integrated information systems for

15 Profitability of herd health control and management

16 Disease control programs in developing countries:

17 How dowe integrate economics into the policy development

Use of spreadsheets in animal health economics

18 Building aspreadsheet model

19 Computer exercises on animal health economics

Subject index 307

AnimalHealthEconomics isarelatively newdiscipline,whichisprogressively developing

Wageningen /Palmerston North,May 1996

Table 6.1 Results of SME Herds - 78

Figure 7.1 Determination of the Optimal Time for Replacement - 86

Available feed not

Digestion Altered feed Nutritive value of

Metabolism Altered natural utilization

Effects on herd maintenance Altered replacement pattern and reduced

1.2 Mechanisms bywhichdiseasemayalteranimal productivity

Effects of diseaseon feed digestibility

Effects of disease on physiological processes

1.3 Measurable effects of diseases on livestock productivity

Changed value of animals and products from slaughtered animals

Reduced live weight gain

Reduced yield and quality of products from live animals

Reduced capacity for work

Altered production of dung for fuel and fertilizer

Altered feed conversion efficiency

1.4 Effects of disease on herd productivity

Reduced productive life of animals

Lessaccurate genetic selection

Effects on capacity to maintain and improve the herd

1.5 Effect of disease control measures on productivity of animals

1.6 Effects of animal disease on human and animal welfare

Effects on community development

Cultural significance of animals

1.7 Methods of measuring the economic benefit of animal disease control

1.8 Concluding remarks

Morris,R.S., 1973.Thedepression ofquartermilkyieldcaused bybovinemastitis,and the response

Scott,PR., Kelly,J.M.,Whitaker,D.A.&Cameron,N.D., 1980.Marginal magnesiumdeficiency as

Webster, A.J.F., 1995.Understanding thedairy cow.BSPProfessional Books,Oxford, 357pp.

A.A. Dijkhuizen 1 ', R.B.M. Huirne 1 ' & R.S. Morris 2 )

2.2 The basic economic model

Resources Products People

Figure 2.7 Thebasicmodel underlying economic analysis (Howe &Mclnerney, 1987)

Livestock -»- Livestock

Other ->- Other