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Financial Evaluation of Investment in Biosecurity

  

Dec 16, 2015

    

The recent outbreak of highly pathogenic avian influenza which affected large in-line egg production units has resulted in upgrading Structural Biosecurity although at face value greater emphasis is currently placed on Operational Biosecurity.  It is axiomatic that capital investment in improvements including impervious roads, fences, vehicle wash stations and biosecurity modules for personnel is required before effective Operational Biosecurity can be implemented. Following the 1983/4 outbreak of H5N2 highly pathogenic avian influenza in Pennsylvania, there was a transitory interest in upgrading biosecurity although the cosmetic and superficial changes effected over the past thirty years obviously were inadequate to prevent the spread of the reassortant H5N2 infection after introduction into areas with a high density of poultry during the spring of 2015. 

Many of the decisions made concerning investment are influenced by practices in other countries, subjective evaluation and knowledge from the epidemiology of catastrophic infections with an emphasis on the modes of transmission. Evaluating the economic impact of investment in biosecurity was outlined in a publication in Avian Diseases in 1987*   In this article, investment in three levels of biosecurity was evaluated for broiler breeder flocks against four categories of disease ranging from mild to catastrophic with a range of probabilities of infection.  Realistic costs and assumed values relating to infection were used to determine the justification for investment of capital in Structural Biosecurity and enhanced Operational Biosecurity. Essentially it was demonstrated that with severe and catastrophic diseases, investment in effective levels of biosecurity generated a positive benefit to cost ratio even at low probabilities of infection such as one outbreak in twenty years.

The question of the degree to which producers should invest to limit the probability of introduction of HPAI into a complex is the subject of a boiler-plate, hypothetical complex of one-million hens.  It is estimated that the losses attributed to an outbreak of HPAI involving complete depopulation of a unit might exceed $10 million.  This figure is based on the difference between the value of flocks and the quantum of Federal compensation; expenditure on disposal of dead birds; decontamination of the facility; loss of income during the long pre-repopulation period and loss of goodwill.  It is noted that following outbreaks of HPAI, the wholesale price for eggs increases sharply, providing enhanced margins for unaffected farms and magnifying the potential loss borne by producers who are affected.

For the purposes of calculation, it is assumed that a one-million hen complex would suffer losses amounting to $10 million following exposure to HPAI.  Two levels of capital expenditure for Structural Biosecurity were considered. Respectively, these would cost either $50,000, which would provide a 50 percent level of protection in the event of exposure or $200,000 involving more sophisticated installations, which would provide an 80 percent level of protection. 

The probability of exposure of a complex or farm can range from zero with no challenge, to unity (1.0) which means an absolute certainty of exposure in a given time period.

The projected loss following exposure, considering each of the two levels of biosecurity can be calculated from the numerical value incorporating the financial consequences of infection, the probability of exposure and the level of protection.

  

If it is assumed that the loss associated with introduction of a catastrophic infection into a one-million hen complex is $10 million and the levels of protection provided by the combination of Structural and Operational biosecurity are repectively 80 percent and 20 percent, the two levels of loss can be expressed as:-

                

  1. - 0.8 = 0.2  for an investment of  $200,000  or
  1. - 0.5 = 0.5  for an investment of  $50,000

 

If it is assumed that there is a 0.1 probability of exposure, the loss sustained by a producer would be:-

Quantum of loss  x  probability of infection  x   level of loss

$10 million x 0.1 x 0.2 = $200,000

The relatively low level of Structural and Operational Biosecurity costing $50,000 would contribute to the following loss in the event of exposure:-

$10 million x 0.1 x 0.5 = $500,000

The difference between the theoretical losses associated with the high and low levels of investment would be $300,000 per outbreak.

The difference between investment in the high and low levels of biosecurity is $150,000.

The benefit to cost ratio at the 0.1 probability of infection is therefore $300,000 ÷ $150,000 = 2:1

The benefit to cost ratio can be calculated for a range of probabilities extending from 0.1 to 1.0 yielding benefit to cost ratios of 2:1 extending to 10:1.

The boilerplate conceptual model described above can be adapted to specific situations.  Obviously the higher the risk of infection such as location in an area with a high concentration of susceptible poultry, proximity to large expanses of water which attracts migratory birds and proximity of farms dictate a proportionately higher level of Structural and Operational Biosecurity as evidenced by events in Iowa and Nebraska during the 2015 May to June epornitic. 

It is possible using realistic costs and reasonable assumptions to quantify potential losses associated with specific diseases and to select an appropriate level of investment which provides a quantifiable return.

*Gifford, D.H., Shane, S.M., Hugh-Jones, M.E. and Weigler, B.J. (1987). Evaluation of Biosecurity in Broiler Breeders. Avian Diseases 31; 339-344