In anticipation of the post-drought repopulation of cattle herds once the rains come again, last month's column focused on valuing post-drought bred replacement heifers. This month, we'll look at valuing alternative-aged, bred cows in the same post-drought era.
A key point in valuing both classes of females is for ranchers to appreciate at which stage of the cattle cycle the industry is in currently. The cattle cycle makes a big difference in the economic value of bred females.
Here are my five steps for determining the economic value of alternative-aged beef cows.
Step 1: Develop a set of long-run planning prices.
I project we are in for volatile calf prices the next few years — all triggered by the extended drought. This fall's calf prices were weak due to record beef production and record carcass weights. But calf prices are projected to now show some strength as a result of lowered beef supplies and the upcoming demands of repopulation.
About two years following that repopulation, beef prices will again be pressured as supplies increase due to the repopulation buildup in cattle numbers. That latter stage will complete the down phase of this current cattle cycle.
Note: In discussing the valuation of alternative-aged bred heifers, I will use the same long-run planning prices as presented in last month's discussion.
Step 2: Prepare a cash flow budget for your beef cowherd.
The economic value of bred females in your herd depends on your herd's cost structure. This isn't your neighbors' average or the regional average; it is your own herd's average cash costs of production.
To get started, you must generate a cash flow account documenting your herd's net cash flow. Figure 1 shows my recommended cash flow account format and summarizes the average cash flow account for my 1999 Integrated Resource Management (IRM) Cooperator herds.
The herds in Figure 1 are well-managed herds run by individuals with one to seven years of formal IRM cost-cutting experience. My experience indicates it takes two to five years to effectively implement cost-cutting strategies.
These IRM herds average 163 cows with an average capital investment of $2,007/cow. This includes the breeding herd, beef cow facilities, beef cow equipment and pasture land. Investments in farming machinery and farmland are not included.
The average gross cash income per cow is $433. The average feed costs of raised feeds, purchased feeds and pasture is $170/cow. Non-feed cash costs, including livestock expenses and debt service costs, total $176/cow for a total average cash cost of $346/cow.
In addition, the average unit cash cost of producing a hundredweight of calf is $81. When the $60 average family living draw is included, there's an average of $27/cow earned net cash flow/cow before taxes.
Some cash flow adjustments need to be made when using a net cash flow account in evaluating the proposed purchase of bred females. Debts on existing cows should not be allocated to new purchased cows. As a result, the $55 debt service on the old cows was added back, as well as the $60 family living draw.
Thus, the total net cash flow projected for the proposed purchased bred females is $142/cow. This $142 could be applied to the purchase of bred females.
I then recalculated the net cash flow annually for 2003 to 2009 based on the long-run planning prices constructed in Step 1. These annual, projected, long-run net cash flows were presented in chart form in last month's column.
Step 3: Project the value of a cull cow in the year of her last calf.
I recommend using the Food and Agricultural Policy Research Institute's (FAPRI) long-run cull cow prices for determining the future value of cull cows. (See Figure 2.)
Step 4: Determine the appropriate discount interest rate.
Use the interest rate that you're paying on your long-term land loan. I used 6% in this example.
Step 5: Calculate the net present value (NPV) for bred females with different lifetime calf numbers.
As described last month, each year's projected net income from that female, including her value as a cull cow, must be discounted back to today's dollars. The sum of all discounted annual net incomes is the economic value of a beef cow having that number of calves. Figure 3 presents the NPV for cows producing multiple lifetime number of calves.
In Figure 3, column 4 summarizes the calculated economic value for a bred heifer in fall 2003 that starts calving in spring 2004 and has seven consecutive calves. The annual nominal incomes for this heifer total $1,273. The discounted NPV of this fall 2003 pregnancy-checked heifer is projected at $971. (Not that this is $53 less than the value reported last month due to some formula corrections made in this month's calculations.)
Figure 3 suggests that if a pregnancy-checked heifer can be purchased for $971 in fall 2003, this investment would earn a 6% rate of return on that investment.
Column 5 represents a special case in which the heifer calves as a two-year old, is open as three-year old, but has five consecutive calves after that. Note that in 2003 it costs $275 to run her for that open year. Her calculated NPV is $596. By missing her second calf, her NPV is reduced by $375.
The key point is that this heifer is projected to be open early in her lifetime and during one of the high market-price years. This example reinforces how the stage of the cattle cycle can affect the economic value of open females.
Column 5 presents the economic value of a bred female who has six consecutive calves, beginning with her first calf in spring 2004. After accounting for a higher projected cull cow salvage value and the loss of the seventh calf's discounted net income, the economic value of this bred female is $928 — only $43 less than a bred heifer that has seven calves.
This illustrates that the seventh calf isn't projected to contribute much to the economic value. Given where we are in the cattle cycle, it's more critical for these females to have consecutive calves early in their lifetime than to have the seventh calf.
Columns 6-9 present the calculated economic value for a bred female having five, four, three or two consecutive calves. The drop in calculated economic value is relatively small as the number of calves produced goes down. This reinforces the notion that the high-profit calves will be produced in the early part of the time period being considered.
I recommend drought-induced ranchers go through this exact set of calculations when contemplating their repopulation strategy. You just can't escape the financial impact of the cattle cycle and its resulting beef price cycle, even in a drought repopulation.
Harlan Hughes is a North Dakota State University professor emeritus. He lives in Laramie, WY. Reach him at 701/238-9607 or [email protected].