ECONOMICS OF ENVIRONMENTAL CONTROL FOR LIVESTOCK D. D.psburn1 and LeRoy Hahn'

Probability techniques, when combined with climatological records and known responses of domestic animals to environment permit prediction o f production losses during periods of adverse environment. These pre- dictions plus the additional costs and returns associated with an en viron- mental control system provide the necessary informatiorr to determine its profitability. The "present value" method is utilized to determine the profitability of a summer environmental control systeni, using production responses of dairy cows and climatological records for Colunibia, Mis- souri, as n specific example.

LE COOT ET LES AVANTAGES D~UN CONTR~LE DES CONDITIONS DE MILIEU POUR LE BETAIL

Les rapports climatologiques combinis avec les riactions connues des aniniaux de ferme d une certain milieu perniettront la prkdiction des pertes dons la production, sous des conditions de milieu variies. Ces pri- dictions en plus des renseignements sur le coiit d'un contrBle des conditions de milieu fourniront l'information nicessaire afin de diterminer l'efficaciti dune telle niithode. Cette dissertation Pvalue I'efficaciti d'une mr'thode de ce genre durant I'iti, en employant comine exemple le rendetnent dam la production des vaches hitiires et les rapports climntologiqrres dam la rigion de Colirmbia, Missouri.

Management decisions concerning various forms of shelter for live- stock production animals have, in the past, been based largely on manager comfort or general guidelines to provide desired environments ( 1 ) *. Laboratory investigations of functional relationships between the biol- logic response of the animals and weather even,ts, such as milk production decline as a function of ambient temperature, have been available for several years but do not provide a clear-cut economic basis for rational decision-making.

ECONOMIC FACTORS IN ENVIRONMENTAL CONTROL

Decline in Production Expected seasonal production declines are necessary as a founda-

tion for an economic evaluation of environmental control. In a recent report, Hahn and McQuigg (2) used functional relationships to develop nonparametric (estimated) probabilities of occurrence of production declines. Combining the probability of occurrence of a given weather event, P [f (w)], with the biological response function related to that event, provides the probability of the given biological response, P (B) :

1 Resource Economist. Department of A g r i c d M l Industries. Southern Illinois University. Carbon-

2 Agriculma.1 Engineer. Livatock Engineering and Farm Strucnua Research Branch, Agricultural

Numben in prenchaa refer m appended references.

dale (formerly Port-Doctoral Fellow, Univenir). of Missouri. Columbia).

Engineering Research Division, ARS, USDA. Glumbis. Missouri.

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This probability then gives the livestock owner information for an invest- ment decision since expected production declines for specified periods can be computed.

Using this approach, Hahn and McQuigg estimated the summer pro- duction losses (June 1 through September 30) for a herd of 100 lactating Holstein dairy cows located in the Columbia, Missouri area. Figure 1 shows the empirical probability curve used in their development, with the daily mean Temperature-Humidity Index (THI)3 used as a weather event related to production loss. This index value was related to Holstein production decline (3) through the equation

121 MDec. = -2.370 - 1.736 NL + .02474 (NL) (THI) where MDec. = absolute decline in milk production, lb/day-cow

NL = normal level of production, Ib/day THI = daily mean Temperature-Humidity Index value.

Summing the expected production declines over the 122-day summer season for the THI interval from 70 to 82 provided total loss per cow per season. Table 1 presents expected seasonal production losses for pro- duction levels of 50, 70, and 100 Ib/cow-day. Note that production de- clines are larger in response to increased T H I values for the higher normal levels of production.

Providing environmental control to maintain mean daily THI values equal to or less than 70 will, of course, eliminate these expected produc- tion losses. Such benefits may then be used in an economic evaluation.

Decline in Feed Intake

Using data from Table 3 of Reference 4 which provides hay intake data for lactating cows subjected to various temperature-humidity com- binations, a regression equation was obtained for hay consumption de- cline4 as a function of THI. Several possible forms of the equation were considered including factors of THI and normal production level in various combinations. The equation of best fit was

HDec. = -62.24 + 0.863 THI 131 where HDec. = absolute decline in hay consumption, Ib/day-cow

The correlation coefficient for this relation was r = 0.557, and the THI = daily mean Temperature-Humidity Index.

3 THI is a derived statistic computed from the relation THI = .SStdb + .2tm + 17.5

where tdb = dry-bulb temperature tap = dew-point temperature

4 Decline of hay consumption was used because ”. . . hay consumption ( i s ) a good indicator of temperature effects on fccd intake” ( 4 , p.. 10). Grain intake waa maintained constant for each cow regardless of THI, so it waa not considered in the evaluation.

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standard error of estimate was 3.78 lb/day. Expected total summer sea- son hay consumption decline for a Holstein cow in the mid-Missouri area, using this relation integrated over the THI interval of 70 to 82, would be about 135 pounds, regardless of produotion level.

Since providing environmental control would result in the cows eating this amount of additional hay, an evaluation of the increased cost of hay intake is necessary. Good alfalfa hay has an Estimated Net Energy value of 826 therms per ton or 41.3 therms per 100 pounds.6 The cost per them of hay, using a representative figure of $28.00/T for alfalfa hay in mid-summer in Missouri is $0.034. The cost of supplying the additional 134 pounds of hay which contains 55.34 therms of energy is then $1.88 for each cow.

Environmental Control Equipment

Assuming barn facilities and related equipment are already available, additional fixed costs incurred as the result of environmental control would be limited to air-conditioning equipment and insulation of the barn.

Available information on dairy barns that have actually been air- conditioned suggest 0.5 to 0.7 tons (nominal rating) per cow are required (5, 6). The lower figure is also in line with projections made by Yeck, et al (7) based on stable heat and moisture measurements in the Missouri Climatic Laboratory. The actual cooling requirement per cow would, of course, be dependent on design conditions at the given location.

Current initial costs of air-conditioning equipment in large tonnages, such as might be installed in a dairy, range from $350 to $600 per ton. The economic life of such equipment when used for livestock housing is unknown but probably in the range of 10 to 15 years. Maintenance costs, including repairs, filters, cleaning, painting, etc., are in order of $5.17 per ton per year for large installations (8).

Costs for installing insulation in existing barns are quite variable. The cost ranges from $9 to $33 per cow (5).

The remaining significant cost item that must be considered is oper- ating cost. Electric energy used by air-conditioned farm structures has been related to cooling degree-days (9) through the equation

EC = 2.83 + 0.68 DD 141 where EC = daily energy consumption (kwh/ton of air conditioning)s

DD = daily cooling degreedays, computed using a mean daily dry- bulb temperature base of 60°F.

5 htimaced Nn Energl is a term which is replicinu TDN u a measure of feed value 8 Assumes that one ton refrigerrtion requires one horsepower input.

PRODUCTION LEVEL: 50 100

100 90 80 70 60 50 40

DAILY MEAN THI (W)

FIGURE 1.

Empirical probability curve for production decline of Holstein cows at Columbia, Missouri, based on 20-year distribution function of daily mean THI values (June 1 to September 30). Direct evaluation can be made for the chances of production losses for cows of two levels of production. For example, the probability of a 50 Ib/day producer declining in production by 2 Ib/day is 0.32; i.e., on about one day in three during the summer months, the cow would experience this much production loss.

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Using a 20-year climatological record for Columbia, Missouri, an analysis was made of the number of cooling degreedays per day and the frequency of occurrences during the summer season (June 1 through September 30). From this analysis, the kwh/ton one would expect to use during the 122-day season was determined to be 1493.

Rates for electrical energy in the mid-Missouri area range from 1.5 to 2 cents per kwh, depeding on the rate of use.

ECONOMIC EVALUATION

New agricultural techniques of production can generally be classified as 1) cost reducing and 2) yield increasing, or 3) a combination of 1) and 2). Regardless of the type of innovation, they must be evaluated from an economic point of view to determine if adoption is economically feasible.

Investment alternatives, differing with respect to pay off periods, necessitate the use of a priority system to rank investment alternatives according to some selected investment criteria.

Criteria for Ranking Investment Alternatives

There are four methods commonly used to evaluate investment alter- natives: 1 ) Payback period, 2) Average rate of return, 3) Present value, and 4 ) Internal rate of return.’ However, only the “present value tech- nique will be employed in this study to evaluate the profitability of com- plete environmental control for dairy cattle.

The “present value” method computes the present value of future earnings: i.e., future returns are discounted at some interest rate. The appropriate rate of interest that is selected for discounting depends upon the earning power of an investment in alternative uses. However, in the present analysis 4, 5 , and 6 percent rates of interest are arbitrarily selected as the discount rates. An environmental control system could be con- sidered a profitable investment as long as the sum of all discounted returns (present value) exceeds the initial cost.

i For a discussion of the relative mcrio of orher techniques. one might use to rank investment alternatives, mders are referred to the following references: W. T. Baumol and R E. Quandt Investment and Discounc Rates Under Cap id Rationing - A Prop-ing Approach. Economi; l o u m d , vol 75 1965. pp. 317-329. Kirshleifer. F. “On the Theory of Optimal Investment Decision,” id Ezia Solomon (ed.) Tb8 MaMg-t of Corfiordu Cafdd. Glencoe. Illinois: Free Press. 1959. Blaug. Mark. Economic1 of Educmon: A Selected Annotated Bibliography. (Inrer- national Series of Monographs in Library and Information Service. Vol. 111). London: Pergvnon Press. 1966. A. A. Alchjm. “The Rate of Interest. Fisher’s Rate of R m v n Over Cost. and Keynes’ Internal Rare of Return, Amm’can Economic RM‘w. XLV. December 1955 p 938-43. Joel Dean. Capirnl Budgeting, New York: Columbia University Press, 1951. ’Paul A: gamuebon. “Some Aspects of the Price Theory of Capital.” Quanerly Journal of Economics Ll (1936.37) pp. 469- 96. J. F. Weston and E. F. Brigham. Munugurinl Pinancu, Ind. Ed., ‘Near York: RiAehan and Winston, 1966.

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Economic Analysis of Environmental Control

Climatological records for Columbia, Missouri, suggest a priori that air conditioning may not be economically feasible at present. However, since expected production loss data are available for cows in that area, as previously discussed, it will be used to determine if an investment in an environmental control system is profi,table.

A complete economic analysis - an analysis under numerous as- sumptions regarding varying costs and cow productivity - would be redundant and unwarranted for this particular location. Therefore, the economic analysis proceeds under the assumptions of high producing cows (100 pounds per day) and the lowest cost estimates for equipment and electrical energy. Table 2 presents data used in the analysis, assuming a 1 OOcow herd with previously existing structural and equipment facilities available.

Costs and Returns of Envirnnmental Cnntrd

An itemization of annual fixe and variable costs with expected an- nual returns is given in Table 3.

Determining the profitability of an investment requires that the entrepreneur investigate net returns after taxes; i.e., the amount of added revenue available to pay for the original investmenL8

Assuming an economic life of 15 years and zero salvage value, the discounted net revenues are given in Table 4. The summations of the “Present Value” columns show that only for the 4 percent interest rate does the investment approach the breakeven point of $15,000 (total ori- ginal fixed cost). At interest rates greater than this, environmental control is currently not feasible for dairy cows in confinement under climatic conditions similar to those of Columbia, Missouri.

Further investigation of environmental control is indicated to be in order for regions in the U.S. with less favorable summer conditions, such as in the South. However, application of various environmental modifica- tion practices (less than complete environmental control) to areas such as Columbia, Missouri, may prove practical.

A LOOK AHEAD

As production levels of all domestic livestock increase, eliminating the effects of adverse environments increases in relative importance. Environmental control systems to provide desired conditions are currently expensive in relation to the financial benefits obtained. Any basic re-

8 A similar technique h u becn applied rn a capid budgeting problem for a herringbone prrlot investment ( 10 ) .

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search which reduces fixed or variable costs of an environmental control system improves its economic feasibility. Likewise, institutional arrange- ments which increase milk prices or lowers power costs will enhance the profitability. Therefore, investment in environmental control systems will undoubtedly become a feasible investment alternative for some pro- ducers, perhaps in cold areas as well as in areas with unfavorable sum- mers. Much remains to be done to investigate not only environmental control, but environmental modification as well, using such techniques as evaporative cooling, inspired-air cooling and partial air conditioning.

In addition, research efforts are needed to determine the effects of environment on other classes of livestock, such as beef cattle and broilers, and to quantify other benefits which an environmental control system would provide such as increased fertility, butter fat content, and operator comfort. The many complex facets of environmental control systems emphasize the need for cooperation among animal scientists, engineers, economists, equipment manufacturers, and power suppliers.

TABLE 1

Expected Number of Days h Each THI Interval

and Associated Milk Production Decline by Produdon Level, for Columbia, Missouri (per 122-day season, June 1-September 30. based on 20-year climatological record)

Expected No. Production Decline Under Varying Production Levels, THI of Days in per day8 and seasonb (lb/cow)

Intend Interval 50 70 lo@

perday Season perday Season perday Season

69.6-70.5 70.6-71.5 71.6-72.5 72.6-73.5 73.6-74.5 74.6-75.5 75.6-76.5 76.6-77.5 77.6-78.5 78.6-79.5 79.6-80.5 80.6-81.5 8 1.6-82.5

9.0 0 0 0 0 9.9 0 0 0 0 9.6 0 0 .8 7.7

10.2 1.1 11.2 2.5 25.8 9.0 2.4 21.6 4.3 38.4 9.3 3.6 33.5 6.0 55.8 6.4 4.8 30.7 7.7 49.4 6.9 6.1 42.1 9.4 65.3 4.2 7.3 30.7 11.2 47.0 2.2 8.6 18.9 12.9 28.4

.6 9.8 5.9 14.6 8.8 0 11.1 0 16.4 0

.1 12.3 1.2 18.1 1.8

0 0 0 0 2.2 20.7 4.6 47.2 7.1 63.9 9.6 89.6

12.0 77.1 14.5 100.2 17.0 71.4

22.0 13.1 24.4 0 26.9 2.6

19.5 42.8

Total Production Loss for 122-day Season: 195.8 328.4 528.6

- a Production M i n e (Ib. per day) = -2.370 - 1.736 NL + .02474 (NLTHI). b Sersond production IOU found by multiplying expmcd 00. of &p in THI intend - pro-

c Production declines for COWS prodIlci0g 100 Ib/&y M t t ~ ~ e d co f d o w the relvion cxprrsr& jo duction loss per &9.

quation 121, although no animals of this production level were represented in the ram&.

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TABLE 2

Cost and Return Data for an Analysis of Environmental Control for Lactating Holstein Cows, Columbia, Mksouri

Number of cows Production level each cow Tons of air conditioning required per cow Cost per ton of air conditioning Maintenance cost for air-conditioning equipment Economic life of air-conditioning equipment Electric energy consumption (seasonal) Cost per unit of electric energy Cost of insulating existing barn per cow Cost of alfalfa hay per ton (mid-summer price) Price received for milk per cwta

100 100 Ib/day 0.4 T $350.00 $5.17/T 15 Years 1493 h h / T $0.0 15 $10.00 S28.00 $5.00

a Although limitations are implied by using $5.00 per an. as rhe prim for milk. it b rePlbtic at chis time since future institutional facmn (milk markctins ordm and a ~ m m e n a ) annot be pre- dicted. Past milk prices suggest chat a na(tc of milk prim from $4.50 10 $6.00 be investigated.

TABLE 3

Fixed Costs, Variable Costs and Ekpected Returns of Environmental Control for 100-Cow Holstein D&y Herd, Columbia, Missouri.

Fixed Costs (total):

Air-conditioning equipment (40 T @ $350/T) $14,000 Insurlation for existing barn ($lO/cow) 1 ,m

$15,Ooo

Fixed Costs (annual):

Equipment and insulation (based on 15Year economic life) 1 ,ooo

1,000

Variable Costs (annual):

Operating cost per season (1493 h h / T x 40 T x S.015) 986 Maintenance of equipment (SS.17/T x 40 T) 207 Additional feed consumption ($188/cow) 188

1,291

Returns (annual):

Gross return from added production per year (528.6 Ib/cow

(Gross return less annual variable costs)

able 11 @ $S/cwt) Added income K fore taxes and depreciation

2,643

1,352

a Based on dam from Table 2.

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TABLE 4

Annual and Discounted Rehuos Associated with an Environmental Cootrd System.

Added Year Income Added Added Added Added Present Resent Present

Before Depre- Taxable Tax& Return Value Value Value Taxes ciationb Income ((201.2-5) (4%) (5%) (6%)

(see Table 3) (Col. 2-3)

1 2 3 4 5 6 7 8 9

10 11 12 13 14 15

1352 1000 1352 1000 1352 lo00 1352 1000 1352 lo00 1352 1000 1352 1000 1325 1000 1352 1000 1352 1000 1352 1000 1352 1000 1352 lo00 1352 1000 1352 1000

352 352 352 352 352 352 352 325 352 352 352 352 352 352 352

Od 70.40 70.40 70.40 70.40 70.40 70.40 70.40 70.40 70.40 70.40 70.40 70.40 70.40 70.40

1352 1282 1282 1282 1282 1282 1282 1285 1282 1282 1282 1282 1282 1282 1282

1300.62 1287.10 1274.94 1184.57 1162.77 1140.98 1139.70 1107.65 1076.88 1096.1 1 1055.09 1015.34 1055.09 1005.09 957.65 1012.78 956.37 903.81 974.32 9 11.50 852.53 937.14 867.91 803.81 899.96 826.89 758.94 866.63 787.15 715.35 833.30 749.97 675.61 799.97 714.07 637.15 769.20 679.46 601.25 739.71 647.41 566.64 711.51 616.64 534.59

14,320.61 13,375.07 12,515.47

a Figures in all columns cxcepc ( 1) are in terms of dollars. b Straight line depreciation used. Tax situations of some farms m a y dimtc the use of faster depre-

c A 20 percent UI rate assumed to be applied to added taxable income (Col. 4 ) . d No cua for the first g e u is due to investment credit provisions.

ciatiod techniques.

REFERENCES 1. Hahn, G. L., H. S. C. Thorn, and T. E. Bond. “Livestock Shelter Design,”

Agricultural Engineering. 43 ( 12) : 704-709. December 1962. 2. Hahn, LeRoy, and J. D. McQuigg. “Expected Production Losses for Lactating

Holstein Dairy Cows as a Basis for Rational Planning of Shelters,” American Society of Agricultural Engineers Paper MC-67-107. April 1967. ’

3. Berry, I. L.. M. D. Shanklin. and H. D. Johnson. “Dairy Shelter Design Based on Milk Production Decline as Affected by Temperature and Humidity,” Transactions of the ASAE, 7(3):329-331. 1964.

4. Johnson, H. D., A. C. Ragsdale, I. L. Berry, and Milton D. Shanklin. ‘Tem- perature-Humidity Effects Including Influence of Acclimation in Feed and Water Consumption of Holstein Cattle.” Missouri AES Research Bulletin 846. November 1963.

5. Stewart, R. E., J. C. Notestine, D. L. Pfost. and W. R. Schnug. “Field Tests of Summer Air Conditioning for Dairy Cattle in Ohio,” ASHRAE Transactions, 7( 1) :271-282. 1966.

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6. IIahn LeRoy, J. D. Sikes, Milton D. Shanklin, and H. D. Johnson. “Dairy Cow Responses to Summer Air Conditioning as Evaluated by a Switchback Experimental Design,’’ AS- Paper 67-945, Detroit, Michigan. December 1967.

7. Yeck, R. G., M. D. Shanklin, and R. E. Stewart. “Design Factors for Air Conditioning and Bentgating Dairy Cattle Structures,” Transactions of the

8. American Society of Heating, Refrigerating and Air Conditioning Engineers, Inc. “Owning and Operating Costs,” Chapter 25 (pp. 969-976), A S H W Guide and Data Book, Applications Volume. 1964.

9. Hahn, LeRoy, T. E. Bond, and C. F. Kelly. “Relation of Cooling Indices to Electric Energy Use of Air-conditioned Farm Structures.” Trunsuctiom of the ASAE, 6(3):241-243, 248. 1963.

10. Wadsworth, H. A., Jr. “Evaluating Farm Investments by Capital Budgeting,” Journal of Farm Economics, 44(5): 1444-1449. 1962.

ASAE, 3(2):5’7-8. 1960.