Three features of the REAP program (registration, NAJ Equity fees, production records and type evaluation, plus the Jersey Mating Program) have the potential to provide herd owners with cash returns:

• Increased value from selling surplus animals as Registered Jerseys compared to selling non-registered animals.

• Increased lifetime profitability from animals that result from using the Jersey Mating Program (JMP) because the JMP can properly account for detrimental inbreeding effects when determining how a set of the breed’s best males should be mated to a herd’s females.

• Increased production from using the herd performance reports and genetic transmitting estimate reports included in the REAP program.

There are two standard questions that need to be answered when considering investments. "How much money will the investment make?" And, "What rate of return will be earned on the money invested?" Net Present Value (NPV) and Internal Rate of Return (IRR) analysis were used to examine the expected cash returns from REAP along with its costs. The expected cash returns and the timing of those returns were estimated using dairy industry information:

• A 10-year project life. A 10-year project life balances the time required to realize herd improvements resulting from breeding program modifications with the difficulty of forecasting accurately too far in the future.

• 175-cow herd size, the average for currently enrolled REAP herds.

• 5% annual growth in herd size, the average for currently enrolled REAP herds.

• 8% annual sales of breeding stock. DRMS-Raleigh statistics show an average of 6.5% of the milking herd is sold for breeding purposes. The typical dairy herd consists of as many heifers as milking cows, and herds generally sell as many heifers for breeding stock as cows. Therefore, breeding stock sales would equal 13% of the milking herd. However, the herd growth rate should be subtracted from the breeding stock sales because animals that are used to increase the herd size will not be available for sale.

• 9.5% interest rate.

• Beginning animal registration fees of $20 per cow based on current AJCA registration fees.

• $240 added income per animal sold for breeding purposes, both annually and when the herd is sold at the end of 10 years, based upon historical data from Jersey Marketing Service transactions.

• $59 per cow increased lifetime profitability from JMP matings due to control of inbreeding, over a three-year herd life per cow.

• 10% of the increased production due to TPE, based upon comparison of DHIR and non-DHIR herd production from DRMS-Raleigh.

• 40% tax rate. This is a typical tax rate that includes all federal, state, and local taxes.

Based on the above assumptions, the 10-year project yielded a NPV of $52,000 and an IRR of 64%. Obviously these returns result in a recommendation that a herd fitting this profile should undertake the REAP project.

One of the primary variables in the scenario used is whether the herd will be dispersed after 10 years. Many herds continue in operation under the same ownership for 20 or 30 years or even longer. Calculating the NPV and IRR without the herd salvage value at the end of 10 years resulted in a NPV of $19,000 and an IRR of 54%. The REAP program is still a good 10-year investment for Jersey owners not intending to sell their herds.

Some herds have obtained outstanding production levels without using the TPE program. These herd owners may want to analyze the program solely from the returns of adding value to their annual sales of breeding stock and increased lifetime profitability from using JMP recommendations. These two features of REAP result in an NPV of $7,500 and an IRR of 32%.

Three specific features can be tracked to increasing cash flows for the herd owner.

Inbreeding Control. JMP has the longest time lag between incurred cost and cash returns of any REAP feature incorporated into the NPV analysis. This is simply because of the generation interval between when cows and heifers are mated using JMP recommendations and when the resulting offspring enter milking herds and the mating benefits are realized. This analysis assumes that by year 4, 25% of the entire milking herd will consist of cows resulting from year 1 JMP mating recommendations, and that by year 7, the entire herd will consist of cows resulting from JMP recommendations. Cash inflows realized from using JMP aren’t seen until Year 4, and full cash inflows are not realized until Year 7 of REAP enrollment. Using a 175-cow herd that is growing 5% per year, the cash inflows from the JMP portion of REAP were calculated.

Sales For Dairy Purposes. Enrolling a herd in the REAP program will not lead to an immediate price premiums when selling cattle for breeding stock. A herd will need time before the performance programs included in the REAP package begin to build the pedigrees of their animals to the point of commanding selling prices higher than grade cattle. For this reason, the Registered Jersey price premium was phased in as one-third of the price premium in year 2, two-thirds in year 3, and the full price premium in year 4 and after.

Increased Production. Do the features of official performance records lead to higher production, or do the higher producing herds enroll in the AJCA’s program? In either event, the fact that herds enrolled on such programs have higher production is irrefutable. However, it would be a mistake to credit all of the increased production to the Association’s program. On the other hand, it would also be erroneous to assume that REAP does not offer any tools or incentives to increase production. In addition, using the Jersey Mating Program should also lead to higher production. For the purposes of this cash flow analysis, 10% of the additional production was credited to the REAP program. However, the benefits from being enrolled in performance programs will not be realized immediately. The returns from the increased production were phased into the cash flow analysis: 25% of the 10% production increase in year 3, 50% in year 4, 75% in year 5, and 100% in year 6 and after.

This theoretical NPV and IRR analysis indicated that, over time, the combination of all of the benefits in the AJCA’s REAP program can increase cash flows for Jersey herds and at a rate that exceeds virtually any expected cost of capital.

If you would like to examine the potential impact of REAP for your operation, contact Erick Metzger at the AJCA office, 614/861-3636.