Barnyard Boon or Bust? The National Animal Identification System

Northwestern Financial Review, Feb 1-Feb 14, 2007 by Pakko, Michael R

A program to identify and track U.S. farm animals has many farmers and ranchers angry and suspicious. Now being implemented by the U.S. Department ofAgriculture, the Natinnal Animal Identification System (NAIS) calls for registering all premises involved with animal agriculture, tagging all farm animals and tracking these animals through a system of producer-reporting and state-managed databases.

Opponents of NAIS worry about data security. Small farmers, in particular, oppose the program, because they say it will cost too much.

According to the USDA, the plan will enable the federal government to trace, within 48 hours, the origin of any animal in the food chain found to be infected by disease. Working groups comprised of industry and government representatives are developing implementation plans for cattle, swine, sheep, goats, horses, poultry, and more.

The Agriculture Department's draft strategic plan originally called for the system to become mandatory in 2008. Responding to criticism of this timetable, the USDA has backed away from mandatory features of the program and has begun emphasizing voluntary participation. An implementation plan published in October 2006 set milestones and benchmarks, envisioning a fully functional system in operation by January 2009. The plan noted that "allowing market forces ... to drive producer participation in the NAIS is preferable to mandatory federal regulations." A newly released User's Guide, published in November 2006, emphasized voluntary participation even further, describing how individual producers could choose their level of participation in the program.

Agriculture Department officials envision the identification system as a "public/private partnership." However, the lack of a clear division of costs among various levels of government and producers has created uncertainty.

The cost of identifying every U.S. farm animal has been the focus of much critical attention. Agriculture Department officials foresee state governments and producers paying for much of the program. Federal funding for the program was only $18.8 million in 2004, with $33 million per year in subsequent years. This funding level has been sufficient to pay for initial administration costs and to provide support to states for setting up premises identification.

States and producers will pay for the remaining costs, which are likely to be substantial. Having established criteria for uniform record-keeping, the Agriculture Department is authorizing private database managers to collect animal tracking information and is authorizing particular manufacturers to provide official identification tags. Individual states may allocate some funding, but individual producers probably will pay for a large share of tagging and tracking animals.

Researchers at Kansas State University developed a spreadsheet that estimates how much producers will have to pay to implement RFID technology for cattle. The cost per head of implementing the system varies in proportion to herd size. The authors point out that not all the costs included in their analysis would necessarily be associated with NAIS. In particular, some smaller producers would probably not have to buy chip-reading equipment and computers for data management. Nevertheless, the technology itself is not scale-neutral: Fixed costs raise the cost per animal for small farmers, while economies of scale help keep the unit cost down for larger operations.

According to the 2002 Census of Agriculture, the median number of cattle and calves per farm is fewer than 50. Opposition to a national animal identification system tends to come from these smaller producers. Ranches with more than 50 head represent only one-third of all farms, but account for 87 percent of all cattle and calves.

One important feature of risk analysis is the general principle of diminishing returns. As in many economic analyses, the mitigation of some risk can be relatively inexpensive, but the cost can increase as more risk is addressed. It is often cost-effective to follow policies that mitigate some risk, but rarely can risk be totally eliminated. In this particular example, efforts to include the smaller producers face this escalating cost schedule.

With benefits of animal tracking technology increasing and costs decreasing for larger herds, there is likely to be a threshold level where participation in NAIS provides a net benefit. The distribution of herd sizes suggests that even a fairly low level of participation among producers could cover a large proportion of the nation's animals.

As the most recent User's Guide indicates, this level of voluntary participation is likely to be far more economically efficient than the original plan of mandatory 100 percent participation. Indeed, much criticism about the NAIS has focused on the high cost of the initial mandatory proposals. Assuming that the overall benefits of the program make its costs worthwhile, a system based on voluntary participation is far more likely to result in an efficient distribution of costs than a mandatory program.