So, tl;dr for my post: Breeding is broken and even lies to you in some ways. I've written my observations below. Trait acquisition is fucked.
So I have been mass breeding elves to try and get a specific set of traits, had a long list of what I wanted, and I can't even get past my first stage of my plan. First stage I wanted to combine Potent III and Nurturing III, but not only has that not happened in 2 in game years of play (without cheats I should mention), but it is excruciating to get an offspring spawn with either trait at level 3.
About a year in, and I started to pay attention to how the breeding actually works. Potent does NOT affect inheriting traits like the description led me to believe, but instead helps offspring develop with a new trait neither parent had. I'm not sure if this new trait can spawn at level 2, or only level 1. To actually inherit traits, you need to first breed a Nephelym with desires, and then level those desires until they start to give bonuses. Desires go from Enjoys, to Likes, to Loves, and can be forced to change. For example if a Nephelym spawns enjoying the male breeder variant, you can force that to change to something else, like a female foxen, for example. Then, if you get that enjoy to change to like, the Nephelym will gain a 10% chance to pass traits to offspring, which is what potent claims to do, but doesn't. I didn't get to test these desires out much yet though, because they seem to have another issue that makes breeding pointless...
Desires seem to not spawn on an offspring if they get a trait at level 3, it seems impossible, which means even if I was trying to merge two level 3 traits, I would have never been able to.
Because of this, the hard limit for level III traits on Domestic Nephelym seems to be a maximum of only one!