As more normal rainfall patterns return, ranchers will need to repopulate their herds. The good news: bringing bred heifers into your herd over the next year or two should be quite profitable.
This bred-heifer outlook is based on my current strong price projections for calf prices over the next three to four years. My projections suggest we've even entered into a new price plateau for beef feeder calf prices for this beef price cycle.
For one, U.S. cattle numbers are down, and beef prices should remain strong as producers build the nation's beef cow herd over the next three to four years. Beef prices, however, will likely turn down toward the end of this decade, as the current beef price cycle is projected to bottom out in the 2011-2013 time period.
Thus, the economic potential for a bred heifer is now. A fall 2004, preg-checked heifer is projected to produce her first three calves during this beef price cycle's high calf prices. The production of her remaining calves, however, will likely fall during the lower price period of the current cycle. Typically, calves produced during the lower price years of the beef price cycle don't add much to the economic value of bred heifers.
The time is now
In reality, the maximum economic potential for bred heifers occurs before the run-up in beef prices begins. I expect history to confirm that heifer calves born in 2001, bred in 2002, and producing their first calf in 2003 will be the most valuable heifer during this decade. That's because she will produce more of her calves during the peak prices of the current beef price cycle.
Remember that the sale barn price of a bred heifer differs from that heifer's economic value. The sale barn price of a bred heifer highly correlated with current calf price and is projected to go up over the next couple of years. At the same time, the economic value of heifers in a beef cow herd is projected to go down.
That's because the sum of a heifer's net incomes starting in 2005, 2006 and 2007 will progressively go down as increasingly fewer calves are born during the peak of the current beef price cycle. All this leads to my projections that over-valued bred heifers will be brought into herds in 2006, and possibly 2007, and negate much of the profit potential from running beef cows over the rest of this decade.
The rule of thumb for adding replacement heifers is quite simple: A rancher should add replacement heifers that have economic values greater than the acquisition cost of the bred heifers. (Acquisition cost can be either purchase price or the cost of raising your own replacement heifers.)
The greater the difference between the economic value and the acquisition cost of replacement heifers, the higher the profit potential of that heifer in a beef cow herd. If the acquisition cost exceeds the economic value, a rancher should not add that replacement heifer.
My six rules
For this analysis, I assume a preg-checked heifer will have seven consecutive calves, starting with her first calf in 2005. Here are six steps required to calculate the economic value of a bred heifer in your herd.
Develop a set of calf planning prices for the expected life of the bred heifer. Annual calf planning prices are needed for years 2005 through 2011.
Project annual net income for each of the seven years the heifer is projected to calve in your herd.
Project the salvage value of the cull cow at the end of the seventh year.
Determine the appropriate discount interest rate to use in calculating the time value of money.
Calculate the economic value of a bred heifer.
Adjust for different number of lifetime calves produced.
For most beef producers, developing a set of planning prices is among the most difficult and complex tasks in planning. The problem is beef prices tend to go in cycles and today's price is a poor proxy for long-run planning prices. (My latest long-run planning prices are posted near the bottom of my Web page: www.beefcharts.blogspot.com.)
Fall Northern Plains, 500- to 600-lb. steer calves averaged $77/cwt. in 1998, went up to $91 in 1999, and hit a first peak of $100 in 2001. Calf price dropped to $94 in 2001 and continued downward to $86 in 2002. Calf price turned upward in 2003 to $116 and is projected to hit the beef price cycle peak at $136 this fall.
Prices are projected to remain strong in 2005 at $129, reach a second peak of $133 in 2006, and turn down from 2007 through 2011. I used these long-run planning prices to project the net income for beef cows over for the next seven years.
A new price plateau
The good news is that a new price plateau is projected for the current beef price cycle. As a result, beef calf prices are projected to remain above $100/cwt. throughout the downward phase of this beef price cycle. Cull cow price projections are based on www.fapri.com long-run price projections.
Using North Dakota's Farm Business Management Record Summaries (databased at www.finbin.umn.edu/output/41075.htm), I obtained a five-year (1999-2003) average beef cow enterprise account for Northern Plains beef cow herds. The five-year average calf price was $90/cwt., which generated a $97 five-year average net income for these Northern Plains beef herds. This five-year average net income served as the base for calculating the economic value of a 2003-born heifer checked pregnant in fall 2004.
Beef cow budgets were prepared for each of the seven years this heifer is scheduled to have a calf. Net income per cow is projected at $314 for 2005, $282 for 2006, $224 for 2007, $208 for 2008, $186 for 2009, $170 for 2010, and $159 for 2011. The cull cow value of this heifer after having seven consecutive calves is projected at $444.
The final step is to calculate the net present value (NPV) of these future net incomes. These future net incomes (and cull cow income) total $1,987. But, when a 6% discount rate is used to calculate the time value of money, the NPV of this heifer investment is reduced to $1,560 in today's dollars. (Find these calculations at www.beefcharts.blogspot.com.)
What does this $1,560 economic value of a heifer tell us? It suggests that if this beef cow producer paid $1,560 for this bred heifer this fall, and if my net income projections come true, this $1,560 investment is projected to earn a 6% return on investment (ROI). If this producer pays more than $1,560, he's projected to earn less than 6% ROI. If he pays less than $1,560 for this heifer, he will earn more than 6% ROI.
In summary, a bred heifer is worth all of her future annual net incomes, including her future cull value, while in a rancher's herd discounted back to today's dollars. Given my projected new price plateau, the economic value of today's bred heifers, while not a record high, is still very high. My recommendation — don't wait too long to add heifers to your herd.
Harlan Hughes is a North Dakota State University professor emeritus. He lives in Laramie, WY. Reach him at 701/238-9607 or [email protected].