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MERINOSELECT could go private say AWI consultants

Sheep Central, June 1, 2015

Ram sales genericAustralia’s genetic information and benchmarking service for Merino sheep breeders — MERINOSELECT – was profitable and could operate on a user pays basis, but had cost woolgrowers’ money,  a consultant’s report has concluded.

MERINOSELECT is managed by Sheep Genetics – a joint venture between AWI and Meat & Livestock Australia.

Last year, AWI contracted the BDA Group to do an independent benefits-cost analysis of its $3.3 million investment in genetics and genomics from 2010 and 2013. These genetic investments included the Sheep CRC Information Nucleus Flock (48 percent), the operation and improvement of MERINOSELECT (46pc), and support for the Australian Merino Sire Evaluation Association (4pc).

Profitable, but loss-making…

Although the BDA Group assessed MERINOSELECT as profitable, it also seen as part of a general loss to Australian woolgrowers from genetic and genomic investment by AWI. The BDA Group concluded that AWI’s investment in genetics and genomics of $3.3 million from 2010 to 2013, including MERINOSELECT, generated benefits of $1.5 million in present value terms, but its return of 45 cents for every dollar invested by AWI represented a loss to Australian woolgrowers generally.

The key challenge BDA Group noted in relation to MERINOSELECT’s potentially commercial operation is that the value of the benefits gained from increased genetic gain in hard-to-measure traits are not necessarily reflected in increased ram prices – itself a form of market failure, but not necessarily a justification for on-going AWI funding.

MERINOSELECT could operate commercially

General Manager of Research at AWI, Dr Paul Swan said a key conclusion of the BDA Group analysis involved the concept of market failure – the conclusion that in a real sense, the MERINOSELECT service AWI and MLA established over 10 years ago, could now operate on a user-pays basis.

“The first observation is that MS can operate as a commercial entity with private benefits able to be appropriated by participants and the cost of providing the service effectively priced,” the report said.

Dr Swan said this is a very significant conclusion and a substantial achievement, and something both AWI and MLA, and the wider industry we serve, should be justifiably proud of.

Woolgrowers benefit from buying MERINOSELECT rams

The BDA report said the main reasons for the loss from genetic investments included the funding of the Information Nucleus Flock, for technologies essentially non-commercial at the time, and potentially remaining so.

While the return to Australian woolgrowers from the overall investment has been negative, this did not imply that MERINOSELECT itself does not generate value for participating woolgrowers, the BDA report said.

The MERINOSELECT operation was assessed to be profitable, delivering some $325,000 a year in benefits to participating members in excess of MERINOSELECT operating costs. About $322,950 of MERINOSELECT’s $551,000 operating costs in 2012/13 were recovered through member charges.

Further, additional gains are also realised by commercial woolgrowers who source rams from participating MERINOSELECT stud breeders — about $247,000 a year. In 2013-14 MERINOSELECT users funded all the service’s operational and extension activities, including provision of breeding values, while levy funds covered research and development costs.

Measuring return on investment is important

Dr Swan said AWI took measuring return on investment for woolgrowers very seriously and welcomed the challenging and thorough analysis.

“A key reason for our release of independent reviews of AWI investment portfolios is to openly and transparently challenge our thinking, especially for long-term industry-funded flagship programs where we are trying to help products into the commercial market, through subsidisation of the R&D phase.

“Levy-funded R&D corporations, such as AWI or Meat and Livestock Australia, exist under a market failure justification, and we need to examine this issue carefully in all areas where the assumption is applied.”

The BDA report also said that any future investment by AWI in genetics and genomics needed to consider different options for either increasing the rate of genetic progress, or reducing the costs associated with benchmarking an animal’s performance in studs, across all breeding approaches. While improving MERINOSELECT might be a viable strategy, investment options involving other breeding approaches should also be considered, the consultants said.

Dr Swan said AWI is committed to long-term investment in genetic improvement, and its recent announcement of the $3.3 million, 9-year lifetime productivity project in collaboration with the Australian Merino Sire Evaluation Association is an example of this commitment.

AWI investment should be based on cost vs genetic progress

However, the BDA report said the decision by AWI to invest in MS in the future should be based on an assessment of the cost of the investment weighed against the incremental increase in genetic progress achieved by participating MS studs – not the absolute genetic progress achieved.

“The sufficient condition for investment is that the benefit of overcoming this market failure needs to be greater than the cost of the intervention.”

The report said any future investment by AWI in genetics and genomics needs to consider different options for either increasing the rate of genetic progress through time or reducing the costs associated with benchmarking an animal’s performance in studs across all breeding approaches.

“While improving MS might be a viable strategy, investment options involving other breeding approaches should also be considered.”

Sheep Genetics is working with MLA on preparing a formal response to the BDA analysis. The full report of the BDA analysis of AWI’s investment in Genetics and Genomics from 2010 to 2013 can be viewed at www.wool.com

Source: AWI

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