The U.S. bred female market is very strong. In mid February, some 2-year-old Montana heifers sold for $1,650/head. Given that today's calf prices aren't projected to last, how will these $1,650, bred 3-year olds pay for themselves?
Depreciation alone on a $1,650 purchased 3-year old is calculated at $171/year over a seven-year period, or $240 over five years. This is in addition to the production costs of running a cow for a year.
My Northern Plains benchmark herds spent $1.40/cow/day to run a cow for 365 days. That amounts to $512/cow/year (2004 data), including $128/cow for heifer replacement costs. If I substitute the $171 depreciation charge for the $128 annual replacement cost of the benchmark herds, my annual cow cost is $555/cow.
But not all cows have a calf. If I wean 480 lbs. of calf/female exposed (many herds are below this), that generates a breakeven calf price of $116/cwt. of calf produced.
My projected steer-calf price this fall is around $115, with heifers $5-$6 below that. In fact, I project downward trending calf weaning prices for the rest of this decade. Taking these projections into account, the economic value of a 3-year-old, second-calf heifer is well below $1,650.
What is “economic value?”
The salebarn price and economic value of a preg-checked heifer are different values. The salebarn price tends to be based on today's calf price. The higher today's calf price, the higher the salebarn price for bred heifers.
Conversely, the economic value of a bred heifer is the sum of the annual net incomes she'll generate from each annual calf she produces while in the herd — plus her cull value — all discounted back to today's dollars.
Profit is maximized by purchasing heifers when their economic value exceeds their salebarn price. The greater the difference, the higher the profits. When economic value is below the salebarn price, profits are maximized by not buying that bred heifer.
As pointed out in my February article, there's a time in the cattle cycle to add replacements and a time to not add them. Where in the cattle cycle a heifer is born greatly impacts her economic value.
The case herd used here (Figure 1) consisted of 208 mature cows (no replacement heifers) exposed to the bull in 2004. Of the 208 females, 184 cows were actually held in the Jan. 1, 2005 inventory for calving. Of the exposed females, 83% produced a live calf weaning at an average of 564 lbs.
Calves were on their dams for 175 days, and their weight/day of age was 3.22 lbs., which indicates use of high-growth bulls. This rancher weaned a total of 469 lbs. of calf/female exposed.
Two key factors determine the economic value of a bred heifer in any herd:
The cost/year to run a beef cow, and
The planning prices the rancher uses to assess future net income from these heifers' calves.
Specific economic benchmarks for this case herd are in Figure 2. Note the herd's data is for 2004, while the case herd data is for 2005. The case herd grossed less than the benchmark herds, while the case herd's cost of production/cow exceeded that of the benchmark herds.
As a result, earned net income/cow was only 41% of the benchmark herd's earned net income for 2004. In general, the case ranch's significantly higher overhead costs made the profit difference. This case ranch has a relatively high cost of production.
Figure 3 presents my long-run planning prices. I project annual fall-weaning prices will trend down the rest of the decade.
Cattle cycle simulation
Once a cost and return analysis for the case ranch (summarized in Figure 2) has been completed, and we've selected our long-run planning prices, we can simulate the herd's earned net income and net cash flow for the rest of the current beef price cycle. Space only allows me to present the projected annual net cash flows for this herd to 2014 (Figure 4). These net cash flow projections don't include the $210 debt load (interest and principal) on the existing cow herd, nor is there a family living draw against the new heifers.
The projected net cash flow steadily decreases as the decade's end approaches. By the end of the assumed seven-year productive lives of these heifers in 2012, the net cash flow is less than $50/female/year.
Figure 4's net cash flow projections are where the cash cost of production on the case ranch is taken into account. Every ranch will have a different set of net cash flow projections depending on the production, economic and cash flow efficiency of that ranch's beef cow herd.
Calculating economic value
Figure 5 presents the calculated economic value of a bred heifer on the case ranch, based on the projected annual net cash flows from Figure 4. The top half suggests the economic value in today's dollars of a heifer with seven consecutive calves is $1,000. The actual discounting calculations were done in another table not presented here.
But not all purchased heifers will have seven consecutive calves. Figure 5's bottom half adjusts for the 21 likely culls over the seven-year period, leaving only 19 females to actually have all seven calves. With some of the heifers producing less than seven calves, the calculated economic value of these 40 replacement heifers in today's dollars averages $922/head.
This analysis was calculated with a 7% discount factor. If this rancher purchases heifers at $922, he'll earn a 7% return on his investment. If purchased for more than $922, he'll earn less than that. If purchased for less than $922, he'll earn more than a 7% return.
To order Harlan Hughes' CD, “How To Make The Cattle Cycle Work for You,” send $25 to: Harlan Hughes, 30 Ramble A Road, Laramie, WY 82070.
Harlan Hughes is a North Dakota State University professor emeritus. He lives in Laramie, WY. Reach him at 701/238-9607 or [email protected].
Click on the link below to view Figures 1-5.