Theoretical price of dairy cows and the essence of investment

November 9, 2020
by Noriyuki Morimoto

The theoretical price of a dairy cow is the present value of net cash flow it generates. This can be calculated by estimating the total sales price of milk produced over the life of the cow and subtracting various costs such as feed. But we must make some assumptions for this calculation.

The basic assumptions to make are the life expectancy of the cow and the amount of milk it generates. Given the long history of the dairy industry, sufficient statistics to calculate reasonable estimates should be available. If not, they should be developed for the advancement of the dairy industry and the efficiency of dairy cattle trading. Next is the selling price of milk, which is difficult to predict due to market conditions. But even more difficult to predict is feed prices.

The theoretical price is hypothetical and differs from the actual transaction price. Nevertheless, it is necessary to refer to the theoretical price in order for a transaction to take place. The greater the uncertainty of the assumption, the more uncertain the validity of the theoretical price, the more difficult it is to validate the transaction price, and the more difficult it is to trade the dairy cow.

So how can we reduce the uncertainty of assumptions? The key is the possibility of passing costs on to price. For example, if the rise in feed costs can be passed on to the selling price of milk, the net cash flow will be stable and the theoretical price will also be stable. If the cost cannot be passed on, the net cash flow will decrease and the theoretical price will decrease as well.

The key to whether costs can be passed on to prices is the brand value of the milk. For example, in Hokkaido, the name of the area Tokachi has been established as a brand, so if you can sell milk crowned with that name, you might be able to maintain the sales volume even as you pass on the cost increase to the price.

If a fund is created to invest in dairy cows, its managers will do their best to improve the profitability and security of their investment. Dairy farming will be managed by highly skilled farmers, but the fund managers will never leave them unaided. Efforts will be made in collaboration with contracted farmers to increase the brand value of milk. Only in return for such efforts, which form the essence of the investment management business, should there be management fees.

 

[Category /Strategic Investment]