So the other day I was reading about a Ponzi scheme that had gone wrong and it got me to thinking whether the rapid increase in the value of high index genomic females was nothing more than a big Ponzi scheme?
First let’s look at what the definition of a Ponzi scheme is. A Ponzi scheme is a fraudulent investment operation where the operator, an individual or organization, pays returns to its investors from new capital paid to the players by new investors, rather than from profit earned by the player. Operators of Ponzi schemes usually entice new investors by offering higher returns than other investments, in the form of short-term returns that are either abnormally high or unusually consistent.
Now first let’s be clear that I am not directly implicating anyone as intentionally setting up a Ponzi scheme in the sale of breeding stock. However, when I look at how the prices of high genomic heifers kept going up and up, yet the actual income from these animals had not yet been realized, it certainly does have some similarities. In less than a two-year period, we saw the price of a high-end heifer go from $30,000 to more than ten times that. All of this in a period where those animals would not have had the time to realize that level of income. So these operations that were brokering these purchases had to keep flipping more and more animals in order to keep the cash flowing. The challenge was that eventually the amount of new money coming in to fund the level of return that the early investors were expecting was not enough. Some of the early investors started wondering if they would ever see their money back. This led to a mass panic among those who were in it for the short term as their confidence began to crumble. When this took place, we saw the prices paid for these top animals drop significantly.
It’s important to understand the business model that many of these investors were following. There were really only two sources of revenue for them: A) producing high genomic females and selling them and B) Semen royalties from AI companies. The challenge is that, in order to play the game, they could not sell off their top genomic index females. Furthermore due to no new money in the marketplace, there was no one willing to buy the 2nd tier females that they wanted to sell. At one point, some of these genetic programs were selling off very high, but not topper females, at $2,000 or $3,000 less than the cost of producing them. Thus, they were actually losing money on them. Then came the second part of the equation. Instead of realizing insane royalties from selling semen from the sires in their programs, many of these companies did not get enough in royalties to even cover their own expenses. On top of that they were not even getting enough return to cover the cost of producing the 6-7 other progeny that, unfortunately, would never be profitable. Combine these factors with the high cost of IVF and these companies found themselves losing money. The expected profits promised to investors were non-existent. Interestingly, along the way, as those who were looking for a short term get rich plan started to took their losses and cashed out, , other players came into the market to buy these animals at pennies on the dollar. Most notably among these other players were many of the large AI companies. Unlike the investor money that started the speculation, the AI companies did have a direct line to long term return through semen sales. They were more than happy to acquire these females at significantly less than the cost it would be to buy the bulls. This not only caused losses from the sale of females, but also led to even lower royalties being paid out by the AI companies/ AI companies could now produce their own bulls at a fraction of the cost. Sure they may not be getting the #1 TPI sire, but they were able to produce sires that were high enough for the commercial producer and do it at a fraction of the cost.
The Bullvine Bottom Line
I sincerely don’t believe that anyone ever started out on this genomic investment boom with the plan of initiating a Ponzi scheme. However, based on how the events unfolded, and the way the market responded, that is exactly what happened. When they first started the business model seemed sound, but with one crucial, and ultimately incorrect assumption. That assumption was that the money would come from semen sales. That never happened and the significant investment in high genomic index females, combined with the high costs of producing the next generation of high index females, led to greater and greater cash outlays with no money coming back. Eventually, when the money runs out, investors come looking for an answer. The problem is the only answer “Oops we did not see that coming”. Those are words no investor ever wants to hear.
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